The Return Trends At ComoLtd (TYO:2224) Look Promising

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. 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 ComoLtd (TYO:2224) so let's look a bit deeper.

Return On Capital Employed (ROCE): What is it?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for ComoLtd, this is the formula:

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

0.17 = JP¥471m ÷ (JP¥4.8b - JP¥2.1b) (Based on the trailing twelve months to December 2020).

Therefore, ComoLtd has an ROCE of 17%. In absolute terms, that's a satisfactory return, but compared to the Food industry average of 7.2% it's much better.

Check out our latest analysis for ComoLtd

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

What Can We Tell From ComoLtd's ROCE Trend?

ComoLtd is displaying some positive trends. The data shows that returns on capital have increased substantially over the last five years to 17%. 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 55%. So we're very much inspired by what we're seeing at ComoLtd thanks to its ability to profitably reinvest capital.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 44%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books. However, current liabilities are still at a pretty high level, so just be aware that this can bring with it some risks.

The Bottom Line On ComoLtd's ROCE

To sum it up, ComoLtd has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Considering the stock has delivered 15% to its stockholders over the last five years, it may be fair to think that investors aren't fully aware of the promising trends yet. So with that in mind, we think the stock deserves further research.

One more thing, we've spotted 2 warning signs facing ComoLtd that you might find interesting.

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

If you're looking for stocks to buy, use the lowest-cost* platform that is rated #1 Overall by Barron’s, Interactive Brokers. Trade stocks, options, futures, forex, bonds and funds on 135 markets, all from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

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