To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Having said that, from a first glance at geechs (TSE:7060) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
Understanding Return On Capital Employed (ROCE)
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. To calculate this metric for geechs, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.02 = JP¥91m ÷ (JP¥7.2b - JP¥2.6b) (Based on the trailing twelve months to March 2024).
Therefore, geechs has an ROCE of 2.0%. In absolute terms, that's a low return and it also under-performs the Entertainment industry average of 9.9%.
See our latest analysis for geechs
Above you can see how the current ROCE for geechs compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering geechs for free.
What The Trend Of ROCE Can Tell Us
On the surface, the trend of ROCE at geechs doesn't inspire confidence. To be more specific, ROCE has fallen from 19% over the last five years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.
Our Take On geechs' ROCE
While returns have fallen for geechs in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. But since the stock has dived 74% in the last five years, there could be other drivers that are influencing the business' outlook. Therefore, we'd suggest researching the stock further to uncover more about the business.
One final note, you should learn about the 2 warning signs we've spotted with geechs (including 1 which can't be ignored) .
While geechs isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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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.
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About TSE:7060
Good value with adequate balance sheet.
