Shareholders Are Optimistic That NEW ART HOLDINGS (TYO:7638) Will Multiply In Value

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. 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 ran our eye over NEW ART HOLDINGS' (TYO:7638) trend of ROCE, 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. 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)

0.25 = JP¥2.7b ÷ (JP¥19b - JP¥8.4b) (Based on the trailing twelve months to December 2020).

So, NEW ART HOLDINGS has an ROCE of 25%. That's a fantastic return and not only that, it outpaces the average of 9.2% earned by companies in a similar industry.

View our latest analysis for NEW ART HOLDINGS

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 want to delve into the historical earnings, revenue and cash flow of NEW ART HOLDINGS, check out these free graphs here.

How Are Returns Trending?

In terms of NEW ART HOLDINGS' history of ROCE, it's quite impressive. The company has employed 80% more capital in the last five years, and the returns on that capital have remained stable at 25%. Now considering ROCE is an attractive 25%, this combination is actually pretty appealing because it means the business can consistently put money to work and generate these high returns. If NEW ART HOLDINGS can keep this up, we'd be very optimistic about its future.

On a side note, NEW ART HOLDINGS' current liabilities are still rather high at 44% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Key Takeaway

In summary, we're delighted to see that NEW ART HOLDINGS has been compounding returns by reinvesting at consistently high rates of return, as these are common traits of a multi-bagger. And the stock has followed suit returning a meaningful 48% to shareholders over the last five years. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.

If you'd like to know more about NEW ART HOLDINGS, we've spotted 2 warning signs, and 1 of them makes us a bit uncomfortable.

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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