WorkmanLtd (TYO:7564) Is Very Good At Capital Allocation

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So when we looked at the ROCE trend of WorkmanLtd (TYO:7564) we really liked what we saw.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on WorkmanLtd is:

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

0.26 = JP¥23b ÷ (JP¥108b - JP¥19b) (Based on the trailing twelve months to December 2020).

So, WorkmanLtd has an ROCE of 26%. In absolute terms that's a great return and it's even better than the Specialty Retail industry average of 9.4%.

See our latest analysis for WorkmanLtd

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 WorkmanLtd's past further, check out this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

The trends we've noticed at WorkmanLtd are quite reassuring. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 26%. The amount of capital employed has increased too, by 78%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

Our Take On WorkmanLtd's ROCE

In summary, it's great to see that WorkmanLtd can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. Therefore, we think it would be worth your time to check if these trends are going to continue.

While WorkmanLtd looks impressive, no company is worth an infinite price. The intrinsic value infographic in our free research report helps visualize whether 7564 is currently trading for a fair price.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.

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