ForsideLtd (TSE:2330) Shareholders Will Want The ROCE Trajectory To Continue

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at ForsideLtd (TSE:2330) and its trend of ROCE, we really liked what we saw.

Return On Capital Employed (ROCE): What Is It?

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 ForsideLtd is:

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

0.017 = JP¥32m ÷ (JP¥4.5b - JP¥2.6b) (Based on the trailing twelve months to March 2024).

Thus, ForsideLtd has an ROCE of 1.7%. Ultimately, that's a low return and it under-performs the Software industry average of 14%.

View our latest analysis for ForsideLtd

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

How Are Returns Trending?

The fact that ForsideLtd is now generating some pre-tax profits from its prior investments is very encouraging. About five years ago the company was generating losses but things have turned around because it's now earning 1.7% on its capital. And unsurprisingly, like most companies trying to break into the black, ForsideLtd is utilizing 51% more capital than it was five years ago. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

On a separate but related note, it's important to know that ForsideLtd has a current liabilities to total assets ratio of 57%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line On ForsideLtd's ROCE

Long story short, we're delighted to see that ForsideLtd's reinvestment activities have paid off and the company is now profitable. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 16% to shareholders. So with that in mind, we think the stock deserves further research.

One final note, you should learn about the 4 warning signs we've spotted with ForsideLtd (including 1 which can't be ignored) .

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com