Why The 30% Return On Capital At FLECT (TSE:4414) Should Have Your Attention

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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, the ROCE of FLECT (TSE:4414) looks great, so lets see what the trend can tell us.

What Is Return On Capital Employed (ROCE)?

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. To calculate this metric for FLECT, this is the formula:

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

0.30 = JP¥757m ÷ (JP¥4.0b - JP¥1.5b) (Based on the trailing twelve months to March 2024).

Thus, FLECT has an ROCE of 30%. In absolute terms that's a great return and it's even better than the IT industry average of 15%.

Check out our latest analysis for FLECT

In the above chart we have measured FLECT's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering FLECT for free.

How Are Returns Trending?

We like the trends that we're seeing from FLECT. The numbers show that in the last four years, the returns generated on capital employed have grown considerably to 30%. The amount of capital employed has increased too, by 377%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

On a related note, the company's ratio of current liabilities to total assets has decreased to 37%, which basically reduces it's funding from the likes of short-term creditors or suppliers. This tells us that FLECT has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

What We Can Learn From FLECT's ROCE

All in all, it's terrific to see that FLECT is reaping the rewards from prior investments and is growing its capital base. And with a respectable 18% awarded to those who held the stock over the last year, you could argue that these developments are starting to get the attention they deserve. Therefore, we think it would be worth your time to check if these trends are going to continue.

If you'd like to know more about FLECT, we've spotted 2 warning signs, and 1 of them shouldn't be ignored.

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.