To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Speaking of which, we noticed some great changes in Mbs' (TSE:1401) returns on capital, so let's have a look.
Understanding Return On Capital Employed (ROCE)
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Mbs:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.17 = JP¥561m ÷ (JP¥4.2b - JP¥836m) (Based on the trailing twelve months to November 2023).
Thus, Mbs has an ROCE of 17%. On its own, that's a standard return, however it's much better than the 6.8% generated by the Consumer Durables industry.
Check out our latest analysis for Mbs
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Mbs has performed in the past in other metrics, you can view this free graph of Mbs' past earnings, revenue and cash flow.
What Can We Tell From Mbs' ROCE Trend?
We like the trends that we're seeing from Mbs. Over the last five years, returns on capital employed have risen substantially to 17%. The amount of capital employed has increased too, by 58%. 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.
Our Take On Mbs' ROCE
A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Mbs has. Astute investors may have an opportunity here because the stock has declined 25% in the last five years. That being the case, research into the company's current valuation metrics and future prospects seems fitting.
If you'd like to know about the risks facing Mbs, we've discovered 2 warning signs 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.
About TSE:1401
Flawless balance sheet and slightly overvalued.
