Returns At STORAGE-OHLtd (TSE:2997) Are On The Way Up

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. 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, we've noticed some promising trends at STORAGE-OHLtd (TSE:2997) so let's look a bit deeper.

Understanding 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. To calculate this metric for STORAGE-OHLtd, this is the formula:

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

0.065 = JP¥136m ÷ (JP¥5.1b - JP¥3.0b) (Based on the trailing twelve months to October 2024).

So, STORAGE-OHLtd has an ROCE of 6.5%. In absolute terms, that's a low return and it also under-performs the Commercial Services industry average of 9.7%.

See our latest analysis for STORAGE-OHLtd

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 , check out these free graphs detailing revenue and cash flow performance of STORAGE-OHLtd.

What Can We Tell From STORAGE-OHLtd's ROCE Trend?

The fact that STORAGE-OHLtd is now generating some pre-tax profits from its prior investments is very encouraging. The company was generating losses four years ago, but now it's earning 6.5% which is a sight for sore eyes. And unsurprisingly, like most companies trying to break into the black, STORAGE-OHLtd is utilizing 161% more capital than it was four years ago. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. The current liabilities has increased to 59% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.

In Conclusion...

In summary, it's great to see that STORAGE-OHLtd has managed to break into profitability and is continuing to reinvest in its business. And with a respectable 68% awarded to those who held the stock over the last year, 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.

One more thing: We've identified 3 warning signs with STORAGE-OHLtd (at least 1 which shouldn't be ignored) , and understanding these would certainly be useful.

While STORAGE-OHLtd may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.