If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at JICHODOLtd (TSE:3597) and its ROCE trend, we weren't exactly thrilled.
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. The formula for this calculation on JICHODOLtd is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.077 = JP¥3.0b ÷ (JP¥41b - JP¥1.7b) (Based on the trailing twelve months to March 2024).
So, JICHODOLtd has an ROCE of 7.7%. In absolute terms, that's a low return, but it's much better than the Luxury industry average of 4.2%.
View our latest analysis for JICHODOLtd
Historical performance is a great place to start when researching a stock so above you can see the gauge for JICHODOLtd's ROCE against it's prior returns. If you're interested in investigating JICHODOLtd's past further, check out this free graph covering JICHODOLtd's past earnings, revenue and cash flow.
How Are Returns Trending?
The returns on capital haven't changed much for JICHODOLtd in recent years. The company has employed 20% more capital in the last five years, and the returns on that capital have remained stable at 7.7%. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.
Our Take On JICHODOLtd's ROCE
Long story short, while JICHODOLtd has been reinvesting its capital, the returns that it's generating haven't increased. Although the market must be expecting these trends to improve because the stock has gained 63% over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.
One more thing, we've spotted 1 warning sign facing JICHODOLtd that you might find interesting.
While JICHODOLtd isn't earning the highest return, check out this free list of companies that are 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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About TSE:3597
JICHODOLtd
Engages in planning, manufacturing, and sale of uniforms in Japan and internationally.
Flawless balance sheet 6 star dividend payer.
