Investors Will Want SHIMAMURA's (TSE:8227) Growth In ROCE To Persist

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at SHIMAMURA (TSE:8227) and its trend of ROCE, we really liked what we saw.

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

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. To calculate this metric for SHIMAMURA, this is the formula:

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

0.11 = JP¥56b ÷ (JP¥577b - JP¥73b) (Based on the trailing twelve months to November 2024).

Thus, SHIMAMURA has an ROCE of 11%. That's a relatively normal return on capital, and it's around the 10% generated by the Specialty Retail industry.

View our latest analysis for SHIMAMURA

Above you can see how the current ROCE for SHIMAMURA compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for SHIMAMURA .

How Are Returns Trending?

The trends we've noticed at SHIMAMURA are quite reassuring. Over the last five years, returns on capital employed have risen substantially to 11%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 36%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

The Bottom Line

To sum it up, SHIMAMURA has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And a remarkable 161% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if SHIMAMURA can keep these trends up, it could have a bright future ahead.

If you want to continue researching SHIMAMURA, you might be interested to know about the 1 warning sign that our analysis has discovered.

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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.