AUTOWAVE (TYO:2666) Might Have The Makings Of A Multi-Bagger

Did you know there are some financial metrics that can provide clues of a potential 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at AUTOWAVE (TYO:2666) and its trend of ROCE, we really liked what we saw.

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 AUTOWAVE, this is the formula:

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

0.012 = JP¥87m ÷ (JP¥8.2b - JP¥1.1b) (Based on the trailing twelve months to December 2020).

Therefore, AUTOWAVE has an ROCE of 1.2%. In absolute terms, that's a low return and it also under-performs the Specialty Retail industry average of 9.4%.

See our latest analysis for AUTOWAVE

Historical performance is a great place to start when researching a stock so above you can see the gauge for AUTOWAVE's ROCE against it's prior returns. If you'd like to look at how AUTOWAVE has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is AUTOWAVE's ROCE Trending?

AUTOWAVE has broken into the black (profitability) and we're sure it's a sight for sore eyes. The company was generating losses five years ago, but has managed to turn it around and as we saw earlier is now earning 1.2%, which is always encouraging. While returns have increased, the amount of capital employed by AUTOWAVE has remained flat over the period. So while we're happy that the business is more efficient, just keep in mind that could mean that going forward the business is lacking areas to invest internally for growth. Because in the end, a business can only get so efficient.

What We Can Learn From AUTOWAVE's ROCE

In summary, we're delighted to see that AUTOWAVE has been able to increase efficiencies and earn higher rates of return on the same amount of capital. Since the stock has only returned 4.4% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.

If you'd like to know more about AUTOWAVE, we've spotted 2 warning signs, and 1 of them can't be ignored.

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. 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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