What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. So when we looked at the ROCE trend of AppliedLtd (TYO:3020) we really liked what we saw.
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. The formula for this calculation on AppliedLtd is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.21 = JP¥2.3b ÷ (JP¥17b - JP¥6.0b) (Based on the trailing twelve months to December 2020).
Thus, AppliedLtd has an ROCE of 21%. In absolute terms that's a great return and it's even better than the Specialty Retail industry average of 9.1%.
Check out our latest analysis for AppliedLtd
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating AppliedLtd's past further, check out this free graph of past earnings, revenue and cash flow.
How Are Returns Trending?
AppliedLtd is displaying some positive trends. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 21%. Basically the business is earning more per dollar of capital invested and in addition to that, 53% more capital is being employed now too. So we're very much inspired by what we're seeing at AppliedLtd thanks to its ability to profitably reinvest capital.
What We Can Learn From AppliedLtd's ROCE
To sum it up, AppliedLtd has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And a remarkable 128% total return over the last five years 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.
Like most companies, AppliedLtd does come with some risks, and we've found 4 warning signs that you should be aware of.
If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning 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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About TSE:3020
Flawless balance sheet, good value and pays a dividend.
