Returns Are Gaining Momentum At Tokyo Kikai Seisakusho (TSE:6335)

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, 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. Speaking of which, we noticed some great changes in Tokyo Kikai Seisakusho's (TSE:6335) returns on capital, so let's have a look.

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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. Analysts use this formula to calculate it for Tokyo Kikai Seisakusho:

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

0.042 = JP¥489m ÷ (JP¥14b - JP¥2.3b) (Based on the trailing twelve months to December 2024).

So, Tokyo Kikai Seisakusho has an ROCE of 4.2%. Ultimately, that's a low return and it under-performs the Machinery industry average of 7.8%.

Check out our latest analysis for Tokyo Kikai Seisakusho

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Tokyo Kikai Seisakusho's past further, check out this free graph covering Tokyo Kikai Seisakusho's past earnings, revenue and cash flow .

What Can We Tell From Tokyo Kikai Seisakusho's ROCE Trend?

Shareholders will be relieved that Tokyo Kikai Seisakusho has broken into profitability. The company now earns 4.2% on its capital, because five years ago it was incurring losses. On top of that, what's interesting is that the amount of capital being employed has remained steady, so the business hasn't needed to put any additional money to work to generate these higher returns. That being said, while an increase in efficiency is no doubt appealing, it'd be helpful to know if the company does have any investment plans going forward. So if you're looking for high growth, you'll want to see a business's capital employed also increasing.

Our Take On Tokyo Kikai Seisakusho's ROCE

To sum it up, Tokyo Kikai Seisakusho is collecting higher returns from the same amount of capital, and that's impressive. Since the stock has returned a solid 46% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.

Like most companies, Tokyo Kikai Seisakusho does come with some risks, and we've found 2 warning signs that you should be aware of.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.