Our Take On The Returns On Capital At Showa System Engineering (TYO:4752)

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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. However, after investigating Showa System Engineering (TYO:4752), we don't think it's current trends fit the mold of a multi-bagger.

What is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Showa System Engineering is:

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

0.086 = JP¥497m ÷ (JP¥6.4b - JP¥658m) (Based on the trailing twelve months to December 2020).

So, Showa System Engineering has an ROCE of 8.6%. Ultimately, that's a low return and it under-performs the Software industry average of 15%.

Check out our latest analysis for Showa System Engineering

Historical performance is a great place to start when researching a stock so above you can see the gauge for Showa System Engineering's ROCE against it's prior returns. If you're interested in investigating Showa System Engineering's past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From Showa System Engineering's ROCE Trend?

The returns on capital haven't changed much for Showa System Engineering in recent years. The company has consistently earned 8.6% for the last five years, and the capital employed within the business has risen 31% in that time. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

The Bottom Line

As we've seen above, Showa System Engineering's returns on capital haven't increased but it is reinvesting in the business. Since the stock has gained an impressive 96% over the last five years, investors must think there's better things to come. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

On a final note, we've found 1 warning sign for Showa System Engineering that we think you should be aware of.

While Showa System Engineering 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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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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