We Like These Underlying Return On Capital Trends At note (TSE:5243)

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Speaking of which, we noticed some great changes in note's (TSE:5243) returns on capital, so let's have a look.

Our free stock report includes 2 warning signs investors should be aware of before investing in note. Read for free now.

Return On Capital Employed (ROCE): What Is It?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on note is:

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

0.028 = JP¥65m ÷ (JP¥4.5b - JP¥2.2b) (Based on the trailing twelve months to February 2025).

Thus, note has an ROCE of 2.8%. In absolute terms, that's a low return and it also under-performs the Interactive Media and Services industry average of 14%.

View our latest analysis for note

In the above chart we have measured note'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 note for free.

What Does the ROCE Trend For note Tell Us?

The fact that note is now generating some pre-tax profits from its prior investments is very encouraging. About one year ago the company was generating losses but things have turned around because it's now earning 2.8% on its capital. And unsurprisingly, like most companies trying to break into the black, note is utilizing 37% more capital than it was one year ago. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

Another thing to note, note has a high ratio of current liabilities to total assets of 49%. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Bottom Line On note's ROCE

In summary, it's great to see that note has managed to break into profitability and is continuing to reinvest in its business. And a remarkable 187% total return over the last year tells us that investors are expecting more good things to come in the future. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

If you want to know some of the risks facing note we've found 2 warning signs (1 is a bit concerning!) that you should be aware of before investing here.

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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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.