The Return Trends At Echo Trading (TSE:7427) Look Promising

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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, we've noticed some promising trends at Echo Trading (TSE:7427) so let's look a bit deeper.

What Is 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 Echo Trading:

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

0.13 = JP¥1.5b ÷ (JP¥39b - JP¥28b) (Based on the trailing twelve months to August 2024).

Thus, Echo Trading has an ROCE of 13%. In absolute terms, that's a satisfactory return, but compared to the Consumer Retailing industry average of 9.1% it's much better.

View our latest analysis for Echo Trading

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 Echo Trading has performed in the past in other metrics, you can view this free graph of Echo Trading's past earnings, revenue and cash flow.

What Does the ROCE Trend For Echo Trading Tell Us?

Investors would be pleased with what's happening at Echo Trading. Over the last five years, returns on capital employed have risen substantially to 13%. Basically the business is earning more per dollar of capital invested and in addition to that, 29% more capital is being employed now too. 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.

Another thing to note, Echo Trading has a high ratio of current liabilities to total assets of 70%. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Bottom Line On Echo Trading's 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 Echo Trading has. Since the stock has returned a solid 73% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

On a separate note, we've found 1 warning sign for Echo Trading you'll probably want to know about.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.