Investors Shouldn't Overlook The Favourable Returns On Capital At Fixstars (TSE:3687)

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. That's why when we briefly looked at Fixstars' (TSE:3687) ROCE trend, we were very happy with what we saw.

Trump has pledged to "unleash" American oil and gas and these 15 US stocks have developments that are poised to benefit.

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 Fixstars is:

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

0.37 = JP¥2.5b ÷ (JP¥8.2b - JP¥1.4b) (Based on the trailing twelve months to December 2024).

So, Fixstars has an ROCE of 37%. In absolute terms that's a great return and it's even better than the Software industry average of 16%.

See our latest analysis for Fixstars

In the above chart we have measured Fixstars' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Fixstars .

The Trend Of ROCE

We'd be pretty happy with returns on capital like Fixstars. The company has employed 113% more capital in the last five years, and the returns on that capital have remained stable at 37%. Now considering ROCE is an attractive 37%, this combination is actually pretty appealing because it means the business can consistently put money to work and generate these high returns. If Fixstars can keep this up, we'd be very optimistic about its future.

The Key Takeaway

In summary, we're delighted to see that Fixstars has been compounding returns by reinvesting at consistently high rates of return, as these are common traits of a multi-bagger. Therefore it's no surprise that shareholders have earned a respectable 41% return if they held over the last five years. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.

One more thing to note, we've identified 1 warning sign with Fixstars and understanding this should be part of your investment process.

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.

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

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.