Returns On Capital At KomeriLtd (TSE:8218) Have Stalled

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. Although, when we looked at KomeriLtd (TSE:8218), it didn't seem to tick all of these boxes.

What Is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for KomeriLtd:

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

0.083 = JP¥22b ÷ (JP¥361b - JP¥97b) (Based on the trailing twelve months to December 2023).

Therefore, KomeriLtd has an ROCE of 8.3%. Ultimately, that's a low return and it under-performs the Specialty Retail industry average of 11%.

View our latest analysis for KomeriLtd

In the above chart we have measured KomeriLtd's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for KomeriLtd .

What The Trend Of ROCE Can Tell Us

Things have been pretty stable at KomeriLtd, with its capital employed and returns on that capital staying somewhat the same for the last five years. Businesses with these traits tend to be mature and steady operations because they're past the growth phase. So don't be surprised if KomeriLtd doesn't end up being a multi-bagger in a few years time.

The Bottom Line

In summary, KomeriLtd isn't compounding its earnings but is generating stable returns on the same amount of capital employed. Since the stock has gained an impressive 41% over the last five years, investors must think there's better things to come. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

KomeriLtd could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation for 8218 on our platform quite valuable.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.