MetaReal (TSE:6182) Is Investing Its Capital With Increasing Efficiency

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at the ROCE trend of MetaReal (TSE:6182) we really liked what we saw.

Return On Capital Employed (ROCE): What Is It?

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 MetaReal is:

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

0.37 = JP¥901m ÷ (JP¥4.6b - JP¥2.1b) (Based on the trailing twelve months to May 2024).

Therefore, MetaReal has an ROCE of 37%. In absolute terms that's a great return and it's even better than the Commercial Services industry average of 8.9%.

See our latest analysis for MetaReal

Historical performance is a great place to start when researching a stock so above you can see the gauge for MetaReal's ROCE against it's prior returns. If you're interested in investigating MetaReal's past further, check out this free graph covering MetaReal's past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

Investors would be pleased with what's happening at MetaReal. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 37%. The amount of capital employed has increased too, by 59%. So we're very much inspired by what we're seeing at MetaReal thanks to its ability to profitably reinvest capital.

Another thing to note, MetaReal has a high ratio of current liabilities to total assets of 47%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Key Takeaway

To sum it up, MetaReal has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. However the stock is down a substantial 71% in the last five years so there could be other areas of the business hurting its prospects. In any case, we believe the economic trends of this company are positive and looking into the stock further could prove rewarding.

Like most companies, MetaReal does come with some risks, and we've found 1 warning sign that you should be aware of.

High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com