RACCOON HOLDINGS' (TSE:3031) Returns On Capital Not Reflecting Well On The Business

There are a few key trends to look for if we want to identify the next multi-bagger. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. However, after briefly looking over the numbers, we don't think RACCOON HOLDINGS (TSE:3031) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What Is Return On Capital Employed (ROCE)?

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

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

0.096 = JP¥567m ÷ (JP¥15b - JP¥9.5b) (Based on the trailing twelve months to April 2024).

Therefore, RACCOON HOLDINGS has an ROCE of 9.6%. On its own, that's a low figure but it's around the 8.7% average generated by the Multiline Retail industry.

Check out our latest analysis for RACCOON HOLDINGS

In the above chart we have measured RACCOON HOLDINGS' prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering RACCOON HOLDINGS for free.

What The Trend Of ROCE Can Tell Us

In terms of RACCOON HOLDINGS' historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 9.6% from 13% five years ago. However it looks like RACCOON HOLDINGS might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a side note, RACCOON HOLDINGS' current liabilities are still rather high at 62% 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 Bottom Line On RACCOON HOLDINGS' ROCE

Bringing it all together, while we're somewhat encouraged by RACCOON HOLDINGS' reinvestment in its own business, we're aware that returns are shrinking. And investors may be recognizing these trends since the stock has only returned a total of 1.1% to shareholders over the last five years. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

One final note, you should learn about the 3 warning signs we've spotted with RACCOON HOLDINGS (including 1 which is potentially serious) .

While RACCOON HOLDINGS 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. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com