Under The Bonnet, SHIFT's (TSE:3697) Returns Look Impressive

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. And in light of that, the trends we're seeing at SHIFT's (TSE:3697) look very promising so lets take a look.

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

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. Analysts use this formula to calculate it for SHIFT:

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

0.24 = JP¥11b ÷ (JP¥63b - JP¥20b) (Based on the trailing twelve months to August 2024).

So, SHIFT has an ROCE of 24%. In absolute terms that's a great return and it's even better than the IT industry average of 16%.

Check out our latest analysis for SHIFT

In the above chart we have measured SHIFT's 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 SHIFT .

What Does the ROCE Trend For SHIFT Tell Us?

The trends we've noticed at SHIFT are quite reassuring. The data shows that returns on capital have increased substantially over the last five years to 24%. Basically the business is earning more per dollar of capital invested and in addition to that, 284% more capital is being employed now too. So we're very much inspired by what we're seeing at SHIFT thanks to its ability to profitably reinvest capital.

In Conclusion...

To sum it up, SHIFT has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 95% return over the last five years. In light of that, we think it's worth looking further into this stock because if SHIFT can keep these trends up, it could have a bright future ahead.

Like most companies, SHIFT does come with some risks, and we've found 2 warning signs that you should be aware of.

SHIFT is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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.