Returns At Moi (TSE:5031) Are On The Way Up

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Speaking of which, we noticed some great changes in Moi's (TSE:5031) returns on capital, so let's have a look.

Understanding 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. Analysts use this formula to calculate it for Moi:

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

0.09 = JP¥158m ÷ (JP¥3.6b - JP¥1.9b) (Based on the trailing twelve months to October 2023).

So, Moi has an ROCE of 9.0%. In absolute terms, that's a low return and it also under-performs the Software industry average of 15%.

Check out our latest analysis for Moi

Historical performance is a great place to start when researching a stock so above you can see the gauge for Moi's ROCE against it's prior returns. If you're interested in investigating Moi's past further, check out this free graph covering Moi's past earnings, revenue and cash flow.

What Does the ROCE Trend For Moi Tell Us?

Moi has recently broken into profitability so their prior investments seem to be paying off. The company was generating losses three years ago, but now it's earning 9.0% which is a sight for sore eyes. And unsurprisingly, like most companies trying to break into the black, Moi is utilizing 138% more capital than it was three years ago. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

Another thing to note, Moi has a high ratio of current liabilities to total assets of 51%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

In Conclusion...

Overall, Moi gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. Astute investors may have an opportunity here because the stock has declined 27% in the last year. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

One more thing, we've spotted 2 warning signs facing Moi that you might find interesting.

While Moi isn't earning the highest return, check out this free list of companies that are 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.