Wakou Shokuhin (TSE:2813) Is Looking To Continue Growing Its Returns On Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. 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 Wakou Shokuhin's (TSE:2813) returns on capital, so let's have a look.

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 Wakou Shokuhin:

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

0.16 = JP¥1.5b ÷ (JP¥14b - JP¥4.1b) (Based on the trailing twelve months to June 2024).

Thus, Wakou Shokuhin has an ROCE of 16%. In absolute terms, that's a satisfactory return, but compared to the Food industry average of 7.0% it's much better.

View our latest analysis for Wakou Shokuhin

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're interested in investigating Wakou Shokuhin's past further, check out this free graph covering Wakou Shokuhin's past earnings, revenue and cash flow.

What Does the ROCE Trend For Wakou Shokuhin Tell Us?

The trends we've noticed at Wakou Shokuhin are quite reassuring. The data shows that returns on capital have increased substantially over the last five years to 16%. Basically the business is earning more per dollar of capital invested and in addition to that, 109% more capital is being employed now too. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

One more thing to note, Wakou Shokuhin has decreased current liabilities to 29% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. This tells us that Wakou Shokuhin has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

What We Can Learn From Wakou Shokuhin's ROCE

In summary, it's great to see that Wakou Shokuhin can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. And a remarkable 346% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if Wakou Shokuhin can keep these trends up, it could have a bright future ahead.

One final note, you should learn about the 2 warning signs we've spotted with Wakou Shokuhin (including 1 which is a bit unpleasant) .

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.