The Returns At MEGMILK SNOW BRANDLtd (TSE:2270) Aren't Growing

There are a few key trends to look for if we want to identify the next multi-bagger. 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after investigating MEGMILK SNOW BRANDLtd (TSE:2270), we don't think it's current trends fit the mold of a multi-bagger.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on MEGMILK SNOW BRANDLtd is:

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

0.06 = JP¥18b ÷ (JP¥431b - JP¥122b) (Based on the trailing twelve months to March 2024).

Therefore, MEGMILK SNOW BRANDLtd has an ROCE of 6.0%. On its own, that's a low figure but it's around the 7.4% average generated by the Food industry.

View our latest analysis for MEGMILK SNOW BRANDLtd

In the above chart we have measured MEGMILK SNOW BRANDLtd's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering MEGMILK SNOW BRANDLtd for free.

How Are Returns Trending?

There are better returns on capital out there than what we're seeing at MEGMILK SNOW BRANDLtd. The company has employed 28% more capital in the last five years, and the returns on that capital have remained stable at 6.0%. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

The Bottom Line

In conclusion, MEGMILK SNOW BRANDLtd has been investing more capital into the business, but returns on that capital haven't increased. Unsurprisingly, the stock has only gained 24% over the last five years, which potentially indicates that investors are accounting for this going forward. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

MEGMILK SNOW BRANDLtd does have some risks, we noticed 3 warning signs (and 1 which is potentially serious) we think you should know about.

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.

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