We Like These Underlying Trends At Plaza Create HonshaLtd (TYO:7502)

If you're looking for a multi-bagger, there's a few things to keep an eye out for. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in Plaza Create HonshaLtd's (TYO:7502) returns on capital, so let's have a look.

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. Analysts use this formula to calculate it for Plaza Create HonshaLtd:

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

0.10 = JP¥595m ÷ (JP¥12b - JP¥5.6b) (Based on the trailing twelve months to September 2020).

So, Plaza Create HonshaLtd has an ROCE of 10.0%. In absolute terms, that's a low return, but it's much better than the Commercial Services industry average of 8.1%.

View our latest analysis for Plaza Create HonshaLtd

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're interested in investigating Plaza Create HonshaLtd's past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Plaza Create HonshaLtd Tell Us?

You'd find it hard not to be impressed with the ROCE trend at Plaza Create HonshaLtd. The data shows that returns on capital have increased by 2,661% over the trailing five years. That's not bad because this tells for every dollar invested (capital employed), the company is increasing the amount earned from that dollar. Interestingly, the business may be becoming more efficient because it's applying 26% less capital than it was five years ago. Plaza Create HonshaLtd may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.

Another thing to note, Plaza Create HonshaLtd has a high ratio of current liabilities to total assets of 49%. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

Our Take On Plaza Create HonshaLtd's ROCE

In a nutshell, we're pleased to see that Plaza Create HonshaLtd has been able to generate higher returns from less capital. And with a respectable 82% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

Like most companies, Plaza Create HonshaLtd does come with some risks, and we've found 4 warning signs that you should be aware of.

While Plaza Create HonshaLtd 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. 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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