Why We Like The Returns At CHIeruLtd (TYO:3933)

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. With that in mind, the ROCE of CHIeruLtd (TYO:3933) looks great, so lets see what the trend can tell us.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for CHIeruLtd, this is the formula:

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

0.23 = JP¥492m ÷ (JP¥4.5b - JP¥2.3b) (Based on the trailing twelve months to December 2020).

Therefore, CHIeruLtd has an ROCE of 23%. In absolute terms that's a great return and it's even better than the Consumer Services industry average of 8.0%.

View our latest analysis for CHIeruLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for CHIeruLtd's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of CHIeruLtd, check out these free graphs here.

So How Is CHIeruLtd's ROCE Trending?

Investors would be pleased with what's happening at CHIeruLtd. The numbers show that in the last three years, the returns generated on capital employed have grown considerably to 23%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 41%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

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. Effectively this means that suppliers or short-term creditors are now funding 52% of the business, which is more than it was three years ago. 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 CHIeruLtd's ROCE

All in all, it's terrific to see that CHIeruLtd is reaping the rewards from prior investments and is growing its capital base. And a remarkable 193% 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 CHIeruLtd can keep these trends up, it could have a bright future ahead.

Before jumping to any conclusions though, we need to know what value we're getting for the current share price. That's where you can check out our FREE intrinsic value estimation that compares the share price and estimated value.

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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