We Like These Underlying Return On Capital Trends At ForsideLtd (TSE:2330)

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So on that note, ForsideLtd (TSE:2330) looks quite promising in regards to its trends of return on capital.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed 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)

0.027 = JP¥53m ÷ (JP¥4.4b - JP¥2.5b) (Based on the trailing twelve months to December 2023).

Thus, ForsideLtd has an ROCE of 2.7%. 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 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?

ForsideLtd has broken into the black (profitability) and we're sure it's a sight for sore eyes. While the business was unprofitable in the past, it's now turned things around and is earning 2.7% on its capital. 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. With no noticeable increase in capital employed, it's worth knowing what the company plans on doing going forward in regards to reinvesting and growing the business. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.

Another thing to note, ForsideLtd has a high ratio of current liabilities to total assets of 55%. 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

As discussed above, ForsideLtd appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. And a remarkable 106% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if ForsideLtd can keep these trends up, it could have a bright future ahead.

One final note, you should learn about the 4 warning signs we've spotted with ForsideLtd (including 1 which is concerning) .

While ForsideLtd 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. 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.