Japan Wool Textile (TSE:3201) Hasn't Managed To Accelerate Its Returns

There are a few key trends to look for if we want to identify the next 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at Japan Wool Textile (TSE:3201) and its ROCE trend, we weren't exactly thrilled.

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 Japan Wool Textile is:

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

0.081 = JP¥12b ÷ (JP¥180b - JP¥38b) (Based on the trailing twelve months to November 2024).

Therefore, Japan Wool Textile has an ROCE of 8.1%. On its own that's a low return, but compared to the average of 4.1% generated by the Luxury industry, it's much better.

Check out our latest analysis for Japan Wool Textile

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

What The Trend Of ROCE Can Tell Us

There are better returns on capital out there than what we're seeing at Japan Wool Textile. Over the past five years, ROCE has remained relatively flat at around 8.1% and the business has deployed 31% more capital into its operations. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

In Conclusion...

In conclusion, Japan Wool Textile has been investing more capital into the business, but returns on that capital haven't increased. Since the stock has gained an impressive 90% over the last five years, investors must think there's better things to come. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

Japan Wool Textile could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation for 3201 on our platform quite valuable.

While Japan Wool Textile may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list 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.