The Return Trends At Maezawa Industries (TSE:6489) Look Promising

If you're looking for a multi-bagger, there's a few things to keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Speaking of which, we noticed some great changes in Maezawa Industries' (TSE:6489) returns on capital, so let's have a look.

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

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Maezawa Industries:

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

0.13 = JP¥3.4b ÷ (JP¥35b - JP¥8.6b) (Based on the trailing twelve months to November 2023).

Thus, Maezawa Industries has an ROCE of 13%. In absolute terms, that's a satisfactory return, but compared to the Machinery industry average of 7.9% it's much better.

Check out our latest analysis for Maezawa Industries

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

The Trend Of ROCE

The trends we've noticed at Maezawa Industries are quite reassuring. The data shows that returns on capital have increased substantially over the last five years to 13%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 42%. So we're very much inspired by what we're seeing at Maezawa Industries thanks to its ability to profitably reinvest capital.

On a related note, the company's ratio of current liabilities to total assets has decreased to 24%, which basically reduces it's funding from the likes of short-term creditors or suppliers. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance.

The Bottom Line

All in all, it's terrific to see that Maezawa Industries is reaping the rewards from prior investments and is growing its capital base. Since the stock has returned a staggering 308% 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 Maezawa Industries can keep these trends up, it could have a bright future ahead.

One more thing to note, we've identified 1 warning sign with Maezawa Industries and understanding it should be part of your investment process.

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.