Returns Are Gaining Momentum At Smile Holdings (TSE:7084)

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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. So on that note, Smile Holdings (TSE:7084) looks quite promising in regards to its trends of return on capital.

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)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Smile Holdings:

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

0.044 = JP¥451m ÷ (JP¥13b - JP¥2.3b) (Based on the trailing twelve months to December 2024).

Thus, Smile Holdings has an ROCE of 4.4%. Ultimately, that's a low return and it under-performs the Consumer Services industry average of 9.1%.

See our latest analysis for Smile Holdings

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

How Are Returns Trending?

We're delighted to see that Smile Holdings is reaping rewards from its investments and is now generating some pre-tax profits. About five years ago the company was generating losses but things have turned around because it's now earning 4.4% on its capital. And unsurprisingly, like most companies trying to break into the black, Smile Holdings is utilizing 43% more capital than it was five years ago. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 18%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance.

What We Can Learn From Smile Holdings' ROCE

Long story short, we're delighted to see that Smile Holdings' reinvestment activities have paid off and the company is now profitable. Given the stock has declined 24% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

Smile Holdings does come with some risks though, we found 3 warning signs in our investment analysis, and 2 of those make us uncomfortable...

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.

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.