Is NEW ART HOLDINGS (TYO:7638) A Compounding Machine?

There are a few key trends to look for if we want to identify the next 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. With that in mind, the ROCE of NEW ART HOLDINGS (TYO:7638) looks attractive right now, so lets see what the trend of returns can tell us.

Return On Capital Employed (ROCE): What is it?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for NEW ART HOLDINGS:

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

0.22 = JP¥2.3b ÷ (JP¥19b - JP¥9.2b) (Based on the trailing twelve months to September 2020).

Thus, NEW ART HOLDINGS has an ROCE of 22%. In absolute terms that's a great return and it's even better than the Specialty Retail industry average of 8.8%.

Check out our latest analysis for NEW ART HOLDINGS

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

The Trend Of ROCE

In terms of NEW ART HOLDINGS' history of ROCE, it's quite impressive. The company has employed 84% more capital in the last five years, and the returns on that capital have remained stable at 22%. With returns that high, it's great that the business can continually reinvest its money at such appealing rates of return. If these trends can continue, it wouldn't surprise us if the company became a multi-bagger.

On a separate but related note, it's important to know that NEW ART HOLDINGS has a current liabilities to total assets ratio of 48%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line On NEW ART HOLDINGS' ROCE

In short, we'd argue NEW ART HOLDINGS has the makings of a multi-bagger since its been able to compound its capital at very profitable rates of return. And given the stock has only risen 25% over the last five years, we'd suspect the market is beginning to recognize these trends. That's why it could be worth your time looking into this stock further to discover if it has more traits of a multi-bagger.

On a final note, we've found 3 warning signs for NEW ART HOLDINGS that we think 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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