Returns On Capital At Econach HoldingsLtd (TSE:3521) Have Hit The Brakes

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. However, after briefly looking over the numbers, we don't think Econach HoldingsLtd (TSE:3521) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Trump has pledged to "unleash" American oil and gas and these 15 US stocks have developments that are poised to benefit.

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. The formula for this calculation on Econach HoldingsLtd is:

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

0.059 = JP¥330m ÷ (JP¥6.0b - JP¥426m) (Based on the trailing twelve months to December 2024).

Therefore, Econach HoldingsLtd has an ROCE of 5.9%. Ultimately, that's a low return and it under-performs the Consumer Services industry average of 9.1%.

View our latest analysis for Econach HoldingsLtd

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

What The Trend Of ROCE Can Tell Us

Over the past five years, Econach HoldingsLtd's ROCE and capital employed have both remained mostly flat. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. So unless we see a substantial change at Econach HoldingsLtd in terms of ROCE and additional investments being made, we wouldn't hold our breath on it being a multi-bagger.

The Bottom Line On Econach HoldingsLtd's ROCE

In summary, Econach HoldingsLtd isn't compounding its earnings but is generating stable returns on the same amount of capital employed. And in the last five years, the stock has given away 17% so the market doesn't look too hopeful on these trends strengthening any time soon. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

Econach HoldingsLtd does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is a bit concerning...

While Econach HoldingsLtd isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.