The Trends At AmifaLtd (TYO:7800) That You Should Know About

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we looked at AmifaLtd (TYO:7800), it didn't seem to tick all of these boxes.

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. The formula for this calculation on AmifaLtd is:

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

0.10 = JP¥263m ÷ (JP¥2.9b - JP¥423m) (Based on the trailing twelve months to September 2020).

Thus, AmifaLtd has an ROCE of 10%. On its own, that's a standard return, however it's much better than the 5.4% generated by the Forestry industry.

View our latest analysis for AmifaLtd

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

So How Is AmifaLtd's ROCE Trending?

When we looked at the ROCE trend at AmifaLtd, we didn't gain much confidence. Around three years ago the returns on capital were 16%, but since then they've fallen to 10%. However it looks like AmifaLtd might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a side note, AmifaLtd has done well to pay down its current liabilities to 14% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

Our Take On AmifaLtd's ROCE

Bringing it all together, while we're somewhat encouraged by AmifaLtd's reinvestment in its own business, we're aware that returns are shrinking. And in the last year, the stock has given away 46% so the market doesn't look too hopeful on these trends strengthening any time soon. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

On a final note, we found 2 warning signs for AmifaLtd (1 makes us a bit uncomfortable) you should be aware of.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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