Yappli (TSE:4168) Is Looking To Continue Growing Its Returns On Capital

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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. With that in mind, we've noticed some promising trends at Yappli (TSE:4168) so let's look a bit deeper.

This technology could replace computers: discover the 20 stocks are working to make quantum computing a reality.

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 Yappli:

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

0.17 = JP¥551m ÷ (JP¥4.1b - JP¥744m) (Based on the trailing twelve months to December 2024).

So, Yappli has an ROCE of 17%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Software industry average of 16%.

View our latest analysis for Yappli

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

The Trend Of ROCE

The fact that Yappli 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 17% on its capital. Not only that, but the company is utilizing 160% more capital than before, but that's to be expected from a company trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

One more thing to note, Yappli has decreased current liabilities to 18% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. This tells us that Yappli has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

In Conclusion...

To the delight of most shareholders, Yappli has now broken into profitability. Astute investors may have an opportunity here because the stock has declined 28% in the last three years. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

Yappli does have some risks, we noticed 2 warning signs (and 1 which is potentially serious) we think you should know about.

While Yappli isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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.