Fabrica Holdings (TSE:4193) Might Become A Compounding Machine

Did you know there are some financial metrics that can provide clues of a potential 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. That's why when we briefly looked at Fabrica Holdings' (TSE:4193) ROCE trend, we were very happy with what we saw.

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

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Fabrica Holdings:

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

0.27 = JP¥1.1b ÷ (JP¥5.3b - JP¥1.4b) (Based on the trailing twelve months to March 2024).

Thus, Fabrica Holdings has an ROCE of 27%. In absolute terms that's a great return and it's even better than the Software industry average of 14%.

See our latest analysis for Fabrica Holdings

In the above chart we have measured Fabrica Holdings' prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Fabrica Holdings .

What Can We Tell From Fabrica Holdings' ROCE Trend?

We'd be pretty happy with returns on capital like Fabrica Holdings. Over the past five years, ROCE has remained relatively flat at around 27% and the business has deployed 419% more capital into its operations. Returns like this are the envy of most businesses and given it has repeatedly reinvested at these rates, that's even better. You'll see this when looking at well operated businesses or favorable business models.

On a side note, Fabrica Holdings has done well to reduce current liabilities to 26% of total assets over the last five years. This can eliminate some of the risks inherent in the operations because the business has less outstanding obligations to their suppliers and or short-term creditors than they did previously.

Our Take On Fabrica Holdings' ROCE

In short, we'd argue Fabrica Holdings has the makings of a multi-bagger since its been able to compound its capital at very profitable rates of return. Yet over the last three years the stock has declined 57%, so the decline might provide an opening. That's why we think it'd be worthwhile to look further into this stock given the fundamentals are appealing.

Fabrica Holdings does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those is potentially serious...

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high 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.

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