Under The Bonnet, Tsunagu Group Holdings' (TSE:6551) Returns Look Impressive

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. Speaking of which, we noticed some great changes in Tsunagu Group Holdings' (TSE:6551) returns on capital, so let's have a look.

What Is 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. Analysts use this formula to calculate it for Tsunagu Group Holdings:

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

0.24 = JP¥595m ÷ (JP¥5.0b - JP¥2.5b) (Based on the trailing twelve months to March 2024).

Therefore, Tsunagu Group Holdings has an ROCE of 24%. In absolute terms that's a great return and it's even better than the Professional Services industry average of 16%.

View our latest analysis for Tsunagu Group Holdings

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

What Can We Tell From Tsunagu Group Holdings' ROCE Trend?

Tsunagu Group Holdings is displaying some positive trends. Over the last five years, returns on capital employed have risen substantially to 24%. Basically the business is earning more per dollar of capital invested and in addition to that, 29% more capital is being employed now too. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

On a side note, Tsunagu Group Holdings' current liabilities are still rather high at 50% of total assets. 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.

The Key Takeaway

All in all, it's terrific to see that Tsunagu Group Holdings is reaping the rewards from prior investments and is growing its capital base. Considering the stock has delivered 19% to its stockholders over the last five years, it may be fair to think that investors aren't fully aware of the promising trends yet. So with that in mind, we think the stock deserves further research.

On a separate note, we've found 4 warning signs for Tsunagu Group Holdings you'll probably want to know about.

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.

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