What are the early trends we should look for to identify a stock that could multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Speaking of which, we noticed some great changes in SaftecLtd's (TYO:7464) returns on capital, so let's have a look.
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 SaftecLtd is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.15 = JP¥1.1b ÷ (JP¥12b - JP¥4.2b) (Based on the trailing twelve months to December 2020).
So, SaftecLtd has an ROCE of 15%. In absolute terms, that's a satisfactory return, but compared to the Retail Distributors industry average of 7.2% it's much better.
Check out our latest analysis for SaftecLtd
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 SaftecLtd's past further, check out this free graph of past earnings, revenue and cash flow.
How Are Returns Trending?
Investors would be pleased with what's happening at SaftecLtd. Over the last five years, returns on capital employed have risen substantially to 15%. The amount of capital employed has increased too, by 24%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.
In Conclusion...
To sum it up, SaftecLtd has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.
SaftecLtd does have some risks though, and we've spotted 2 warning signs for SaftecLtd that you might be interested in.
While SaftecLtd 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. 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:7464
SaftecLtd
Provides safety products to the construction industry in Japan.
Flawless balance sheet 6 star dividend payer.
