Returns Are Gaining Momentum At First Baking (TSE:2215)

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Speaking of which, we noticed some great changes in First Baking's (TSE:2215) returns on capital, so let's have a look.

Return On Capital Employed (ROCE): What Is It?

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 First Baking is:

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

0.059 = JP¥598m ÷ (JP¥18b - JP¥7.6b) (Based on the trailing twelve months to December 2023).

Thus, First Baking has an ROCE of 5.9%. On its own, that's a low figure but it's around the 6.9% average generated by the Food industry.

Check out our latest analysis for First Baking

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how First Baking has performed in the past in other metrics, you can view this free graph of First Baking's past earnings, revenue and cash flow.

How Are Returns Trending?

We're delighted to see that First Baking is reaping rewards from its investments and has now broken into profitability. The company was generating losses five years ago, but now it's turned around, earning 5.9% which is no doubt a relief for some early shareholders. At first glance, it seems the business is getting more proficient at generating returns, because over the same period, the amount of capital employed has reduced by 33%. This could potentially mean that the company is selling some of its assets.

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 43% of the business, which is more than it was five 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.

What We Can Learn From First Baking's ROCE

In summary, it's great to see that First Baking has been able to turn things around and earn higher returns on lower amounts of capital. Astute investors may have an opportunity here because the stock has declined 23% in the last five years. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

If you'd like to know more about First Baking, we've spotted 2 warning signs, and 1 of them makes us a bit 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.

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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.