Returns Are Gaining Momentum At Hatsuho ShoujiLtd (TSE:7425)

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So when we looked at Hatsuho ShoujiLtd (TSE:7425) and its trend of ROCE, we really liked what we saw.

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 Hatsuho ShoujiLtd is:

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

0.12 = JP¥1.4b ÷ (JP¥22b - JP¥11b) (Based on the trailing twelve months to March 2024).

Thus, Hatsuho ShoujiLtd has an ROCE of 12%. On its own, that's a standard return, however it's much better than the 7.3% generated by the Trade Distributors industry.

View our latest analysis for Hatsuho ShoujiLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Hatsuho ShoujiLtd'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 Hatsuho ShoujiLtd.

How Are Returns Trending?

Hatsuho ShoujiLtd has not disappointed with their ROCE growth. More specifically, while the company has kept capital employed relatively flat over the last four years, the ROCE has climbed 260% in that same time. 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. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.

On a side note, Hatsuho ShoujiLtd's current liabilities are still rather high at 50% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Key Takeaway

To sum it up, Hatsuho ShoujiLtd is collecting higher returns from the same amount of capital, and that's impressive. Since the stock has returned a staggering 108% to shareholders over the last five years, it looks like investors are recognizing these changes. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

If you want to continue researching Hatsuho ShoujiLtd, you might be interested to know about the 2 warning signs that our analysis has discovered.

While Hatsuho ShoujiLtd 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.

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