Returns On Capital Are Showing Encouraging Signs At LaKeel (TSE:4074)

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. With that in mind, we've noticed some promising trends at LaKeel (TSE:4074) so let's look a bit deeper.

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

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on LaKeel is:

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

0.18 = JP¥775m ÷ (JP¥6.4b - JP¥2.1b) (Based on the trailing twelve months to December 2023).

So, LaKeel has an ROCE of 18%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Software industry average of 15%.

View our latest analysis for LaKeel

Above you can see how the current ROCE for LaKeel compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering LaKeel for free.

How Are Returns Trending?

The trends we've noticed at LaKeel are quite reassuring. The data shows that returns on capital have increased substantially over the last four years to 18%. The amount of capital employed has increased too, by 132%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

In Conclusion...

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what LaKeel has. Astute investors may have an opportunity here because the stock has declined 33% in the last year. With that in mind, we believe the promising trends warrant this stock for further investigation.

LaKeel does have some risks, we noticed 3 warning signs (and 1 which is a bit concerning) we think you should know about.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.