We Like These Underlying Return On Capital Trends At Shofu (TSE:7979)

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, we've noticed some promising trends at Shofu (TSE:7979) so let's look a bit deeper.

We check all companies for important risks. See what we found for Shofu in our free report.

What Is 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. To calculate this metric for Shofu, this is the formula:

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

0.13 = JP¥5.6b ÷ (JP¥50b - JP¥5.3b) (Based on the trailing twelve months to December 2024).

Thus, Shofu has an ROCE of 13%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Medical Equipment industry average of 11%.

See our latest analysis for Shofu

Above you can see how the current ROCE for Shofu compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Shofu .

What Can We Tell From Shofu's ROCE Trend?

We like the trends that we're seeing from Shofu. Over the last five years, returns on capital employed have risen substantially to 13%. The amount of capital employed has increased too, by 59%. So we're very much inspired by what we're seeing at Shofu thanks to its ability to profitably reinvest capital.

Our Take On Shofu's ROCE

In summary, it's great to see that Shofu 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 with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. 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.

On the other side of ROCE, we have to consider valuation. That's why we have a FREE intrinsic value estimation for 7979 on our platform that is definitely worth checking out.

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.

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

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.