Techfirm Holdings (TYO:3625) Shareholders Will Want The ROCE Trajectory To Continue

What trends should we look for it we want to identify stocks that can 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 on that note, Techfirm Holdings (TYO:3625) looks quite promising in regards to its trends of return on capital.

What is Return On Capital Employed (ROCE)?

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. Analysts use this formula to calculate it for Techfirm Holdings:

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

0.076 = JP¥261m ÷ (JP¥4.4b - JP¥989m) (Based on the trailing twelve months to December 2020).

So, Techfirm Holdings has an ROCE of 7.6%. In absolute terms, that's a low return and it also under-performs the IT industry average of 14%.

View our latest analysis for Techfirm Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for Techfirm Holdings' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Techfirm Holdings, check out these free graphs here.

What Can We Tell From Techfirm Holdings' ROCE Trend?

Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. Over the last five years, returns on capital employed have risen substantially to 7.6%. 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 28%. 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 On Techfirm Holdings' ROCE

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Techfirm Holdings has. Astute investors may have an opportunity here because the stock has declined 13% in the last five years. So researching this company further and determining whether or not these trends will continue seems justified.

On a final note, we found 2 warning signs for Techfirm Holdings (1 doesn't sit too well with us) you should be aware of.

While Techfirm Holdings may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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