Japan Reliance Service (TYO:4664) Is Experiencing Growth In Returns On Capital

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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Speaking of which, we noticed some great changes in Japan Reliance Service's (TYO:4664) returns on capital, so let's have a look.

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. Analysts use this formula to calculate it for Japan Reliance Service:

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

0.089 = JP¥215m ÷ (JP¥3.4b - JP¥956m) (Based on the trailing twelve months to December 2020).

Therefore, Japan Reliance Service has an ROCE of 8.9%. In absolute terms, that's a low return but it's around the Commercial Services industry average of 8.2%.

Check out our latest analysis for Japan Reliance Service

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, revenue and cash flow of Japan Reliance Service, check out these free graphs here.

What Does the ROCE Trend For Japan Reliance Service Tell Us?

Japan Reliance Service is showing promise given that its ROCE is trending up and to the right. More specifically, while the company has kept capital employed relatively flat over the last five years, the ROCE has climbed 209% in that same time. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.

The Bottom Line On Japan Reliance Service's ROCE

In summary, we're delighted to see that Japan Reliance Service has been able to increase efficiencies and earn higher rates of return on the same amount of capital. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 1.6% to shareholders. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.

Like most companies, Japan Reliance Service does come with some risks, and we've found 1 warning sign that you should be aware of.

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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