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

To find a multi-bagger stock, what are the underlying trends we should look for in a business? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. And in light of that, the trends we're seeing at MetaReal's (TSE:6182) look very promising so lets take a look.

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¥902m ÷ (JP¥4.6b - JP¥2.1b) (Based on the trailing twelve months to May 2024).

Thus, 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 9.0%.

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.

How Are Returns Trending?

The trends we've noticed at MetaReal are quite reassuring. The data shows that returns on capital have increased substantially over the last five years to 37%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 59%. 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.

Another thing to note, MetaReal has a high ratio of current liabilities to total assets of 47%. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

In Conclusion...

All in all, it's terrific to see that MetaReal is reaping the rewards from prior investments and is growing its capital base. However the stock is down a substantial 78% in the last five years so there could be other areas of the business hurting its prospects. Regardless, we think the underlying fundamentals warrant this stock for further investigation.

MetaReal does have some risks though, and we've spotted 1 warning sign for MetaReal that you might be interested in.

MetaReal is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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.