Trusco Nakayama (TSE:9830) Has Some Way To Go To Become A Multi-Bagger

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. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after investigating Trusco Nakayama (TSE:9830), we don't think it's current trends fit the mold of a multi-bagger.

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. To calculate this metric for Trusco Nakayama, this is the formula:

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

0.094 = JP¥18b ÷ (JP¥245b - JP¥50b) (Based on the trailing twelve months to December 2023).

So, Trusco Nakayama has an ROCE of 9.4%. In absolute terms, that's a low return but it's around the Trade Distributors industry average of 8.0%.

View our latest analysis for Trusco Nakayama

In the above chart we have measured Trusco Nakayama's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Trusco Nakayama .

What Does the ROCE Trend For Trusco Nakayama Tell Us?

The returns on capital haven't changed much for Trusco Nakayama in recent years. The company has employed 38% more capital in the last five years, and the returns on that capital have remained stable at 9.4%. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

In Conclusion...

Long story short, while Trusco Nakayama has been reinvesting its capital, the returns that it's generating haven't increased. Since the stock has declined 14% over the last five years, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don't think Trusco Nakayama has the makings of a multi-bagger.

One more thing, we've spotted 1 warning sign facing Trusco Nakayama that you might find interesting.

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.