The Returns On Capital At Sohgo Security ServicesLtd (TSE:2331) Don't Inspire Confidence

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. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after briefly looking over the numbers, we don't think Sohgo Security ServicesLtd (TSE:2331) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Sohgo Security ServicesLtd is:

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

0.081 = JP¥37b ÷ (JP¥566b - JP¥111b) (Based on the trailing twelve months to September 2024).

Thus, Sohgo Security ServicesLtd has an ROCE of 8.1%. In absolute terms, that's a low return but it's around the Commercial Services industry average of 9.8%.

See our latest analysis for Sohgo Security ServicesLtd

Above you can see how the current ROCE for Sohgo Security ServicesLtd 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 analyst report for Sohgo Security ServicesLtd .

The Trend Of ROCE

When we looked at the ROCE trend at Sohgo Security ServicesLtd, we didn't gain much confidence. Around five years ago the returns on capital were 11%, but since then they've fallen to 8.1%. However it looks like Sohgo Security ServicesLtd might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

The Key Takeaway

To conclude, we've found that Sohgo Security ServicesLtd is reinvesting in the business, but returns have been falling. And with the stock having returned a mere 2.2% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

While Sohgo Security ServicesLtd doesn't shine too bright in this respect, it's still worth seeing if the company is trading at attractive prices. You can find that out with our FREE intrinsic value estimation for 2331 on our platform.

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.