The Trends At Showa System Engineering (TYO:4752) That You Should Know About

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. Although, when we looked at Showa System Engineering (TYO:4752), it didn't seem to tick all of these boxes.

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. The formula for this calculation on Showa System Engineering is:

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

0.089 = JP¥502m ÷ (JP¥6.4b - JP¥731m) (Based on the trailing twelve months to September 2020).

So, Showa System Engineering has an ROCE of 8.9%. In absolute terms, that's a low return and it also 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'd like to look at how Showa System Engineering has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

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

In terms of Showa System Engineering's historical ROCE trend, it doesn't exactly demand attention. Over the past five years, ROCE has remained relatively flat at around 8.9% and the business has deployed 33% more capital into its operations. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

The Key Takeaway

In conclusion, Showa System Engineering has been investing more capital into the business, but returns on that capital haven't increased. Although the market must be expecting these trends to improve because the stock has gained 62% over the last five years. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

On a separate note, we've found 1 warning sign for Showa System Engineering 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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