To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Speaking of which, we noticed some great changes in Socionext's (TSE:6526) 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 Socionext:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.26 = JP¥36b ÷ (JP¥178b - JP¥40b) (Based on the trailing twelve months to June 2024).
So, Socionext has an ROCE of 26%. That's a fantastic return and not only that, it outpaces the average of 13% earned by companies in a similar industry.
View our latest analysis for Socionext
In the above chart we have measured Socionext's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Socionext for free.
How Are Returns Trending?
We like the trends that we're seeing from Socionext. The data shows that returns on capital have increased substantially over the last three years to 26%. The amount of capital employed has increased too, by 62%. So we're very much inspired by what we're seeing at Socionext thanks to its ability to profitably reinvest capital.
The Bottom Line On Socionext's ROCE
To sum it up, Socionext has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And given the stock has remained rather flat over the last year, there might be an opportunity here if other metrics are strong. With that in mind, we believe the promising trends warrant this stock for further investigation.
Socionext does have some risks though, and we've spotted 1 warning sign for Socionext that you might be interested in.
If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning 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.
About TSE:6526
Socionext
Designs, develops, manufactures, and sells system-on-chip (SoC), and solutions/services centering on SoC worldwide.
Flawless balance sheet with moderate growth potential.
