There's Been No Shortage Of Growth Recently For PARK24's (TSE:4666) Returns On Capital

There are a few key trends to look for if we want to identify the next multi-bagger. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding 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. So when we looked at PARK24 (TSE:4666) and its trend of ROCE, we really liked what we saw.

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 PARK24, this is the formula:

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

0.15 = JP¥34b ÷ (JP¥311b - JP¥94b) (Based on the trailing twelve months to April 2024).

Therefore, PARK24 has an ROCE of 15%. In absolute terms, that's a satisfactory return, but compared to the Commercial Services industry average of 9.0% it's much better.

View our latest analysis for PARK24

In the above chart we have measured PARK24's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering PARK24 for free.

What Does the ROCE Trend For PARK24 Tell Us?

PARK24 is showing promise given that its ROCE is trending up and to the right. Looking at the data, we can see that even though capital employed in the business has remained relatively flat, the ROCE generated has risen by 51% over the last five years. So it's likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn't changed considerably. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.

The Bottom Line On PARK24's ROCE

To bring it all together, PARK24 has done well to increase the returns it's generating from its capital employed. Astute investors may have an opportunity here because the stock has declined 18% in the last five years. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

Like most companies, PARK24 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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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.