Saikaya Department StoreLtd (TSE:8254) Is Looking To Continue Growing Its Returns On Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in Saikaya Department StoreLtd's (TSE:8254) returns on capital, so let's have a look.

Understanding Return On Capital Employed (ROCE)

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. Analysts use this formula to calculate it for Saikaya Department StoreLtd:

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

0.02 = JP¥198m ÷ (JP¥12b - JP¥1.8b) (Based on the trailing twelve months to May 2024).

So, Saikaya Department StoreLtd has an ROCE of 2.0%. In absolute terms, that's a low return and it also under-performs the Multiline Retail industry average of 9.4%.

See our latest analysis for Saikaya Department StoreLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Saikaya Department StoreLtd's ROCE against it's prior returns. If you'd like to look at how Saikaya Department StoreLtd has performed in the past in other metrics, you can view this free graph of Saikaya Department StoreLtd's past earnings, revenue and cash flow.

So How Is Saikaya Department StoreLtd's ROCE Trending?

While in absolute terms it isn't a high ROCE, it's promising to see that it has been moving in the right direction. The data shows that returns on capital have increased substantially over the last five years to 2.0%. The amount of capital employed has increased too, by 45%. So we're very much inspired by what we're seeing at Saikaya Department StoreLtd thanks to its ability to profitably reinvest capital.

On a related note, the company's ratio of current liabilities to total assets has decreased to 15%, which basically reduces it's funding from the likes of short-term creditors or suppliers. So this improvement in ROCE has come from the business' underlying economics, which is great to see.

The Bottom Line

In summary, it's great to see that Saikaya Department StoreLtd 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. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 38% to shareholders. So with that in mind, we think the stock deserves further research.

If you want to know some of the risks facing Saikaya Department StoreLtd we've found 3 warning signs (2 are a bit unpleasant!) that you should be aware of before investing here.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.