Seiko (TSE:6286) Might Have The Makings Of A Multi-Bagger

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So when we looked at Seiko (TSE:6286) and its trend of ROCE, we really liked what we saw.

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Return On Capital Employed (ROCE): What Is It?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Seiko is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.085 = JP¥1.5b ÷ (JP¥28b - JP¥11b) (Based on the trailing twelve months to December 2024).

Therefore, Seiko has an ROCE of 8.5%. On its own that's a low return on capital but it's in line with the industry's average returns of 7.8%.

See our latest analysis for Seiko

Historical performance is a great place to start when researching a stock so above you can see the gauge for Seiko's ROCE against it's prior returns. If you're interested in investigating Seiko's past further, check out this free graph covering Seiko's past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

Seiko is showing promise given that its ROCE is trending up and to the right. The figures show that over the last five years, ROCE has grown 223% whilst employing roughly the same amount of capital. So it's likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn't changed considerably. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.

The Bottom Line On Seiko's ROCE

As discussed above, Seiko appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. Since the stock has returned a staggering 140% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it's worth looking further into this stock because if Seiko can keep these trends up, it could have a bright future ahead.

One more thing to note, we've identified 3 warning signs with Seiko and understanding these should be part of your investment process.

While Seiko may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.