Will Saison Information Systems (TYO:9640) Become A Multi-Bagger?

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. And in light of that, the trends we're seeing at Saison Information Systems' (TYO:9640) look very promising so lets take a look.

Understanding 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. To calculate this metric for Saison Information Systems, this is the formula:

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

0.26 = JP¥3.6b ÷ (JP¥20b - JP¥6.4b) (Based on the trailing twelve months to September 2020).

So, Saison Information Systems has an ROCE of 26%. In absolute terms that's a great return and it's even better than the IT industry average of 15%.

See our latest analysis for Saison Information Systems

Historical performance is a great place to start when researching a stock so above you can see the gauge for Saison Information Systems' ROCE against it's prior returns. If you'd like to look at how Saison Information Systems has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

We're delighted to see that Saison Information Systems is reaping rewards from its investments and has now broken into profitability. The company now earns 26% on its capital, because five years ago it was incurring losses. On top of that, what's interesting is that the amount of capital being employed has remained steady, so the business hasn't needed to put any additional money to work to generate these higher returns. So while we're happy that the business is more efficient, just keep in mind that could mean that going forward the business is lacking areas to invest internally for growth. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.

On a related note, the company's ratio of current liabilities to total assets has decreased to 31%, which basically reduces it's funding from the likes of short-term creditors or suppliers. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books.

In Conclusion...

To bring it all together, Saison Information Systems has done well to increase the returns it's generating from its capital employed. And with a respectable 100% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. Therefore, we think it would be worth your time to check if these trends are going to continue.

Saison Information Systems does have some risks though, and we've spotted 3 warning signs for Saison Information Systems that you might be interested in.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.

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