Microwave Chemical (TSE:9227) Shareholders Will Want The ROCE Trajectory To Continue

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding 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. Speaking of which, we noticed some great changes in Microwave Chemical's (TSE:9227) returns on capital, so let's have a look.

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

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 Microwave Chemical, this is the formula:

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

0.028 = JP¥62m ÷ (JP¥2.7b - JP¥534m) (Based on the trailing twelve months to December 2023).

Therefore, Microwave Chemical has an ROCE of 2.8%. Ultimately, that's a low return and it under-performs the Machinery industry average of 8.0%.

Check out our latest analysis for Microwave Chemical

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 want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Microwave Chemical.

The Trend Of ROCE

The fact that Microwave Chemical is now generating some pre-tax profits from its prior investments is very encouraging. Shareholders would no doubt be pleased with this because the business was loss-making three years ago but is is now generating 2.8% on its capital. In addition to that, Microwave Chemical is employing 38% more capital than previously which is expected of a company that's trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

The Key Takeaway

Long story short, we're delighted to see that Microwave Chemical's reinvestment activities have paid off and the company is now profitable. Astute investors may have an opportunity here because the stock has declined 38% in the last year. So researching this company further and determining whether or not these trends will continue seems justified.

If you'd like to know more about Microwave Chemical, we've spotted 2 warning signs, and 1 of them is a bit unpleasant.

While Microwave Chemical 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.