The Return Trends At Seiwa Electric Mfg (TSE:6748) Look Promising

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. With that in mind, we've noticed some promising trends at Seiwa Electric Mfg (TSE:6748) so let's look a bit deeper.

Understanding Return On Capital Employed (ROCE)

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 Seiwa Electric Mfg is:

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

0.064 = JP¥1.2b ÷ (JP¥29b - JP¥11b) (Based on the trailing twelve months to March 2024).

So, Seiwa Electric Mfg has an ROCE of 6.4%. Ultimately, that's a low return and it under-performs the Electrical industry average of 8.4%.

Check out our latest analysis for Seiwa Electric Mfg

Historical performance is a great place to start when researching a stock so above you can see the gauge for Seiwa Electric Mfg's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Seiwa Electric Mfg.

What Does the ROCE Trend For Seiwa Electric Mfg Tell Us?

While in absolute terms it isn't a high ROCE, it's promising to see that it has been moving in the right direction. The data shows that returns on capital have increased substantially over the last five years to 6.4%. Basically the business is earning more per dollar of capital invested and in addition to that, 37% more capital is being employed now too. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

In Conclusion...

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Seiwa Electric Mfg has. And given the stock has remained rather flat over the last five years, there might be an opportunity here if other metrics are strong. So researching this company further and determining whether or not these trends will continue seems justified.

On a separate note, we've found 2 warning signs for Seiwa Electric Mfg you'll probably want to know about.

While Seiwa Electric Mfg 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com