If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. With that in mind, the ROCE of AJIS (TYO:4659) looks attractive right now, so lets see what the trend of returns can tell us.
Understanding Return On Capital Employed (ROCE)
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 AJIS, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.27 = JP¥5.0b ÷ (JP¥22b - JP¥3.4b) (Based on the trailing twelve months to December 2020).
Therefore, AJIS has an ROCE of 27%. In absolute terms that's a great return and it's even better than the Commercial Services industry average of 8.4%.
Check out our latest analysis for AJIS
Above you can see how the current ROCE for AJIS compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
What Does the ROCE Trend For AJIS Tell Us?
It's hard not to be impressed by AJIS' returns on capital. Over the past five years, ROCE has remained relatively flat at around 27% and the business has deployed 111% more capital into its operations. With returns that high, it's great that the business can continually reinvest its money at such appealing rates of return. If AJIS can keep this up, we'd be very optimistic about its future.
The Bottom Line
In short, we'd argue AJIS has the makings of a multi-bagger since its been able to compound its capital at very profitable rates of return. And long term investors would be thrilled with the 150% return they've received over the last five years. So even though the stock might be more "expensive" than it was before, we think the strong fundamentals warrant this stock for further research.
Before jumping to any conclusions though, we need to know what value we're getting for the current share price. That's where you can check out our FREE intrinsic value estimation that compares the share price and estimated value.
If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.
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This article by Simply Wall St is general in nature. 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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About TSE:4659
Excellent balance sheet established dividend payer.
