To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. That's why when we briefly looked at Papyless' (TYO:3641) ROCE trend, we were very happy with what we saw.
Understanding 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. To calculate this metric for Papyless, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.29 = JP¥2.6b ÷ (JP¥15b - JP¥5.9b) (Based on the trailing twelve months to December 2020).
So, Papyless has an ROCE of 29%. In absolute terms that's a great return and it's even better than the Online Retail industry average of 17%.
Check out our latest analysis for Papyless
Historical performance is a great place to start when researching a stock so above you can see the gauge for Papyless' ROCE against it's prior returns. If you're interested in investigating Papyless' past further, check out this free graph of past earnings, revenue and cash flow.
What The Trend Of ROCE Can Tell Us
We'd be pretty happy with returns on capital like Papyless. The company has employed 100% more capital in the last four years, and the returns on that capital have remained stable at 29%. Now considering ROCE is an attractive 29%, this combination is actually pretty appealing because it means the business can consistently put money to work and generate these high returns. If Papyless can keep this up, we'd be very optimistic about its future.
The Key Takeaway
In summary, we're delighted to see that Papyless has been compounding returns by reinvesting at consistently high rates of return, as these are common traits of a multi-bagger. And long term investors would be thrilled with the 168% return they've received over the last five years. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.
While Papyless looks impressive, no company is worth an infinite price. The intrinsic value infographic in our free research report helps visualize whether 3641 is currently trading for a fair price.
High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.
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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:3641
Flawless balance sheet and slightly overvalued.
