There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So, when we ran our eye over System LocationLtd's (TYO:2480) trend of ROCE, we liked what we saw.
What is Return On Capital Employed (ROCE)?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on System LocationLtd is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.15 = JP¥438m ÷ (JP¥3.1b - JP¥168m) (Based on the trailing twelve months to December 2020).
So, System LocationLtd has an ROCE of 15%. That's a pretty standard return and it's in line with the industry average of 15%.
View our latest analysis for System LocationLtd
Historical performance is a great place to start when researching a stock so above you can see the gauge for System LocationLtd's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of System LocationLtd, check out these free graphs here.
What The Trend Of ROCE Can Tell Us
While the returns on capital are good, they haven't moved much. Over the past five years, ROCE has remained relatively flat at around 15% and the business has deployed 49% more capital into its operations. Since 15% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.
The Key Takeaway
In the end, System LocationLtd has proven its ability to adequately reinvest capital at good rates of return. And long term investors would be thrilled with the 184% return they've received over the last five years. So even though the stock might be more "expensive" than it was before, we think the strong fundamentals warrant this stock for further research.
On a separate note, we've found 4 warning signs for System LocationLtd you'll probably want to know about.
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. 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.
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About TSE:2480
System LocationLtd
Provides business support solutions for finance companies in Japan and internationally.
Flawless balance sheet established dividend payer.
