Investors Should Be Encouraged By Tsuburaya Fields Holdings' (TSE:2767) Returns On Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding 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. With that in mind, the ROCE of Tsuburaya Fields Holdings (TSE:2767) looks great, so lets see what the trend can tell us.

Understanding 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. To calculate this metric for Tsuburaya Fields Holdings, this is the formula:

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

0.24 = JP¥14b ÷ (JP¥111b - JP¥52b) (Based on the trailing twelve months to December 2023).

So, Tsuburaya Fields Holdings has an ROCE of 24%. In absolute terms that's a great return and it's even better than the Leisure industry average of 13%.

See our latest analysis for Tsuburaya Fields Holdings

Above you can see how the current ROCE for Tsuburaya Fields Holdings compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Tsuburaya Fields Holdings for free.

What Does the ROCE Trend For Tsuburaya Fields Holdings Tell Us?

The fact that Tsuburaya Fields Holdings is now generating some pre-tax profits from its prior investments is very encouraging. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 24% on its capital. And unsurprisingly, like most companies trying to break into the black, Tsuburaya Fields Holdings is utilizing 23% more capital than it was five years ago. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. The current liabilities has increased to 47% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.

The Bottom Line On Tsuburaya Fields Holdings' ROCE

To the delight of most shareholders, Tsuburaya Fields Holdings has now broken into profitability. And a remarkable 378% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if Tsuburaya Fields Holdings can keep these trends up, it could have a bright future ahead.

One more thing: We've identified 2 warning signs with Tsuburaya Fields Holdings (at least 1 which is significant) , and understanding these would certainly be useful.

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.