Returns Are Gaining Momentum At ELEMENTS (TSE:5246)

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. So when we looked at ELEMENTS (TSE:5246) and its trend of ROCE, we really liked what we saw.

What Is Return On Capital Employed (ROCE)?

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

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

0.091 = JP¥297m ÷ (JP¥4.3b - JP¥986m) (Based on the trailing twelve months to May 2024).

Therefore, ELEMENTS has an ROCE of 9.1%. Ultimately, that's a low return and it under-performs the Software industry average of 14%.

See our latest analysis for ELEMENTS

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

So How Is ELEMENTS' ROCE Trending?

We're delighted to see that ELEMENTS is reaping rewards from its investments and is now generating some pre-tax profits. Shareholders would no doubt be pleased with this because the business was loss-making three years ago but is is now generating 9.1% on its capital. And unsurprisingly, like most companies trying to break into the black, ELEMENTS is utilizing 56% more capital than it was three years ago. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

In Conclusion...

Long story short, we're delighted to see that ELEMENTS' reinvestment activities have paid off and the company is now profitable. Since the stock has returned a solid 22% to shareholders over the last year, it's fair to say investors are beginning to recognize these changes. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

One final note, you should learn about the 3 warning signs we've spotted with ELEMENTS (including 2 which make us uncomfortable) .

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and 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.