Shareholders Are Optimistic That Fabrica Holdings (TSE:4193) Will Multiply In Value

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Ergo, when we looked at the ROCE trends at Fabrica Holdings (TSE:4193), we liked what we saw.

We've discovered 1 warning sign about Fabrica Holdings. View them for free.

What Is Return On Capital Employed (ROCE)?

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)

0.28 = JP¥1.2b ÷ (JP¥5.5b - JP¥1.3b) (Based on the trailing twelve months to December 2024).

So, Fabrica Holdings has an ROCE of 28%. That's a fantastic return and not only that, it outpaces the average of 16% earned by companies in a similar industry.

Check out our latest analysis for Fabrica Holdings

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Fabrica Holdings.

How Are Returns Trending?

In terms of Fabrica Holdings' history of ROCE, it's quite impressive. Over the past five years, ROCE has remained relatively flat at around 28% and the business has deployed 366% 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 24% 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.

The Bottom Line

In summary, we're delighted to see that Fabrica Holdings has been compounding returns by reinvesting at consistently high rates of return, as these are common traits of a multi-bagger. Yet over the last three years the stock has declined 25%, 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 have some risks though, and we've spotted 1 warning sign for Fabrica Holdings that you might be interested in.

High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.

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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.