Socionext (TSE:6526) Knows How To Allocate Capital Effectively

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, the ROCE of Socionext (TSE:6526) looks great, so lets see what the trend can tell us.

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

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 Socionext, this is the formula:

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

0.23 = JP¥32b ÷ (JP¥178b - JP¥37b) (Based on the trailing twelve months to September 2024).

Therefore, Socionext has an ROCE of 23%. That's a fantastic return and not only that, it outpaces the average of 13% earned by companies in a similar industry.

See our latest analysis for Socionext

Above you can see how the current ROCE for Socionext 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 Socionext .

The Trend Of ROCE

Socionext is displaying some positive trends. The data shows that returns on capital have increased substantially over the last three years to 23%. Basically the business is earning more per dollar of capital invested and in addition to that, 62% more capital is being employed now too. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

The Key Takeaway

All in all, it's terrific to see that Socionext is reaping the rewards from prior investments and is growing its capital base. And since the stock has fallen 14% over the last year, there might be an opportunity here. With that in mind, we believe the promising trends warrant this stock for further investigation.

On a separate note, we've found 1 warning sign for Socionext you'll probably want to know about.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.

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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.