If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So on that note, MarutaiLtd (FKSE:2919) looks quite promising in regards to its trends of return on capital.
Understanding 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 MarutaiLtd is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.11 = JP¥997m ÷ (JP¥11b - JP¥1.9b) (Based on the trailing twelve months to December 2020).
Thus, MarutaiLtd has an ROCE of 11%. In absolute terms, that's a satisfactory return, but compared to the Food industry average of 7.1% it's much better.
Check out our latest analysis for MarutaiLtd
Historical performance is a great place to start when researching a stock so above you can see the gauge for MarutaiLtd's ROCE against it's prior returns. If you're interested in investigating MarutaiLtd's past further, check out this free graph of past earnings, revenue and cash flow.
What Can We Tell From MarutaiLtd's ROCE Trend?
MarutaiLtd is displaying some positive trends. Over the last five years, returns on capital employed have risen substantially to 11%. 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 25%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.
Our Take On MarutaiLtd's ROCE
To sum it up, MarutaiLtd has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 62% return over the last five years. 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.
One more thing to note, we've identified 1 warning sign with MarutaiLtd and understanding it should be part of your investment process.
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. 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 FKSE:2919
MarutaiLtd
Produces and sells noodles, seasonings, and confectionery products in Japan.
Excellent balance sheet with proven track record.
