Will Oricon (TYO:4800) Become A Multi-Bagger?

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, the ROCE of Oricon (TYO:4800) looks great, so lets see what the trend can tell us.

What is Return On Capital Employed (ROCE)?

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. Analysts use this formula to calculate it for Oricon:

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

0.31 = JP¥1.0b ÷ (JP¥4.0b - JP¥597m) (Based on the trailing twelve months to December 2020).

So, Oricon has an ROCE of 31%. In absolute terms that's a great return and it's even better than the Interactive Media and Services industry average of 16%.

Check out our latest analysis for Oricon

Above you can see how the current ROCE for Oricon compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Does the ROCE Trend For Oricon Tell Us?

Oricon is displaying some positive trends. Over the last five years, returns on capital employed have risen substantially to 31%. Basically the business is earning more per dollar of capital invested and in addition to that, 38% 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, Oricon has decreased current liabilities to 15% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. This tells us that Oricon has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

The Key Takeaway

All in all, it's terrific to see that Oricon is reaping the rewards from prior investments and is growing its capital base. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

One more thing, we've spotted 2 warning signs facing Oricon that you might find interesting.

High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.

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