Toyo Denki Seizo K.K (TSE:6505) 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? 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. So when we looked at Toyo Denki Seizo K.K (TSE:6505) and its trend of ROCE, we really liked what we saw.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Toyo Denki Seizo K.K, this is the formula:

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

0.026 = JP¥929m ÷ (JP¥52b - JP¥15b) (Based on the trailing twelve months to May 2024).

Therefore, Toyo Denki Seizo K.K has an ROCE of 2.6%. In absolute terms, that's a low return and it also under-performs the Electrical industry average of 8.4%.

View our latest analysis for Toyo Denki Seizo K.K

Historical performance is a great place to start when researching a stock so above you can see the gauge for Toyo Denki Seizo K.K's ROCE against it's prior returns. If you'd like to look at how Toyo Denki Seizo K.K has performed in the past in other metrics, you can view this free graph of Toyo Denki Seizo K.K's past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. Looking at the data, we can see that even though capital employed in the business has remained relatively flat, the ROCE generated has risen by 98% over the last five years. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. 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.

Our Take On Toyo Denki Seizo K.K's ROCE

In summary, we're delighted to see that Toyo Denki Seizo K.K has been able to increase efficiencies and earn higher rates of return on the same amount of capital. Astute investors may have an opportunity here because the stock has declined 20% in the last five years. So researching this company further and determining whether or not these trends will continue seems justified.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Toyo Denki Seizo K.K (of which 1 is potentially serious!) that you should know about.

While Toyo Denki Seizo K.K isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.