Ridge-i (TSE:5572) Is Experiencing Growth In Returns On Capital

There are a few key trends to look for if we want to identify the next multi-bagger. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. Speaking of which, we noticed some great changes in Ridge-i's (TSE:5572) returns on capital, so let's have a look.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Ridge-i:

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

0.049 = JP¥101m ÷ (JP¥2.2b - JP¥86m) (Based on the trailing twelve months to April 2024).

Therefore, Ridge-i has an ROCE of 4.9%. In absolute terms, that's a low return and it also under-performs the IT industry average of 16%.

See our latest analysis for Ridge-i

Historical performance is a great place to start when researching a stock so above you can see the gauge for Ridge-i's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Ridge-i.

The Trend Of ROCE

Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. Over the last two years, returns on capital employed have risen substantially to 4.9%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 51%. So we're very much inspired by what we're seeing at Ridge-i thanks to its ability to profitably reinvest capital.

In Conclusion...

All in all, it's terrific to see that Ridge-i is reaping the rewards from prior investments and is growing its capital base. Since the stock has returned a solid 20% to shareholders over the last year, it's fair to say investors are beginning to recognize these changes. In light of that, we think it's worth looking further into this stock because if Ridge-i can keep these trends up, it could have a bright future ahead.

If you'd like to know more about Ridge-i, we've spotted 3 warning signs, and 1 of them is significant.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.