Why The 23% Return On Capital At Sanrio Company (TSE:8136) Should Have Your Attention

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. And in light of that, the trends we're seeing at Sanrio Company's (TSE:8136) look very promising so lets take a look.

Return On Capital Employed (ROCE): What Is It?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Sanrio Company is:

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

0.23 = JP¥27b ÷ (JP¥156b - JP¥38b) (Based on the trailing twelve months to March 2024).

Thus, Sanrio Company has an ROCE of 23%. That's a fantastic return and not only that, it outpaces the average of 10% earned by companies in a similar industry.

Check out our latest analysis for Sanrio Company

In the above chart we have measured Sanrio Company's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Sanrio Company .

What Does the ROCE Trend For Sanrio Company Tell Us?

Investors would be pleased with what's happening at Sanrio Company. Over the last five years, returns on capital employed have risen substantially to 23%. Basically the business is earning more per dollar of capital invested and in addition to that, 63% more capital is being employed now too. So we're very much inspired by what we're seeing at Sanrio Company thanks to its ability to profitably reinvest capital.

The Key Takeaway

In summary, it's great to see that Sanrio Company 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.

Like most companies, Sanrio Company does come with some risks, and we've found 1 warning sign that you should be aware of.

High returns are a key ingredient to strong performance, so check out our free list ofstocks 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.