Alpha Purchase (TSE:7115) Is Reinvesting To Multiply In Value

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So, when we ran our eye over Alpha Purchase's (TSE:7115) trend of ROCE, we really liked what we saw.

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

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Alpha Purchase:

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

0.21 = JP¥1.1b ÷ (JP¥17b - JP¥11b) (Based on the trailing twelve months to March 2024).

So, Alpha Purchase has an ROCE of 21%. That's a fantastic return and not only that, it outpaces the average of 9.2% earned by companies in a similar industry.

Check out our latest analysis for Alpha Purchase

Historical performance is a great place to start when researching a stock so above you can see the gauge for Alpha Purchase's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Alpha Purchase.

What Can We Tell From Alpha Purchase's ROCE Trend?

In terms of Alpha Purchase's history of ROCE, it's quite impressive. The company has consistently earned 21% for the last three years, and the capital employed within the business has risen 70% in that time. Returns like this are the envy of most businesses and given it has repeatedly reinvested at these rates, that's even better. You'll see this when looking at well operated businesses or favorable business models.

On a separate but related note, it's important to know that Alpha Purchase has a current liabilities to total assets ratio of 68%, which we'd consider pretty high. 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. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

Our Take On Alpha Purchase's ROCE

In summary, we're delighted to see that Alpha Purchase has been compounding returns by reinvesting at consistently high rates of return, as these are common traits of a multi-bagger. Yet over the last year the stock has declined 24%, so the decline might provide an opening. That's why we think it'd be worthwhile to look further into this stock given the fundamentals are appealing.

If you want to continue researching Alpha Purchase, you might be interested to know about the 3 warning signs that our analysis has discovered.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets 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.

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