Here's What To Make Of Truck-One's (FKSE:3047) Returns On Capital

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after briefly looking over the numbers, we don't think Truck-One (FKSE:3047) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What is 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 Truck-One, this is the formula:

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

0.021 = JP¥36m ÷ (JP¥4.5b - JP¥2.8b) (Based on the trailing twelve months to December 2020).

So, Truck-One has an ROCE of 2.1%. Ultimately, that's a low return and it under-performs the Specialty Retail industry average of 9.1%.

Check out our latest analysis for Truck-One

Historical performance is a great place to start when researching a stock so above you can see the gauge for Truck-One's ROCE against it's prior returns. If you're interested in investigating Truck-One's past further, check out this free graph of past earnings, revenue and cash flow.

So How Is Truck-One's ROCE Trending?

On the surface, the trend of ROCE at Truck-One doesn't inspire confidence. To be more specific, ROCE has fallen from 7.3% over the last five years. However it looks like Truck-One 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, Truck-One has done well to pay down its current liabilities to 62% 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. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money. Keep in mind 62% is still pretty high, so those risks are still somewhat prevalent.

The Key Takeaway

Bringing it all together, while we're somewhat encouraged by Truck-One's reinvestment in its own business, we're aware that returns are shrinking. Unsurprisingly, the stock has only gained 34% over the last five years, which potentially indicates that investors are accounting for this going forward. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 4 warning signs for Truck-One (of which 2 are a bit unpleasant!) that you should know about.

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.

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This article by Simply Wall St is general in nature. 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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