Returns On Capital Are Showing Encouraging Signs At Paycloud Holdings (TSE:4015)

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So on that note, Paycloud Holdings (TSE:4015) looks quite promising in regards to its trends of return on capital.

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 Paycloud Holdings, this is the formula:

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

0.074 = JP¥410m ÷ (JP¥7.9b - JP¥2.4b) (Based on the trailing twelve months to May 2024).

So, Paycloud Holdings has an ROCE of 7.4%. Ultimately, that's a low return and it under-performs the Professional Services industry average of 15%.

Check out our latest analysis for Paycloud Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for Paycloud Holdings' ROCE against it's prior returns. If you'd like to look at how Paycloud Holdings has performed in the past in other metrics, you can view this free graph of Paycloud Holdings' past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

While in absolute terms it isn't a high ROCE, it's promising to see that it has been moving in the right direction. The numbers show that in the last one year, the returns generated on capital employed have grown considerably to 7.4%. The amount of capital employed has increased too, by 94%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

In Conclusion...

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Paycloud Holdings has. Astute investors may have an opportunity here because the stock has declined 46% in the last three years. With that in mind, we believe the promising trends warrant this stock for further investigation.

Paycloud Holdings does have some risks though, and we've spotted 3 warning signs for Paycloud Holdings that you might be interested in.

While Paycloud Holdings 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.