Our Take On The Returns On Capital At Pacific Systems (TYO:3847)

If you're looking for a multi-bagger, there's a few things to keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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. So, when we ran our eye over Pacific Systems' (TYO:3847) trend of ROCE, we liked what we saw.

What is 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. The formula for this calculation on Pacific Systems is:

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

0.12 = JP¥665m ÷ (JP¥7.6b - JP¥2.0b) (Based on the trailing twelve months to September 2020).

Therefore, Pacific Systems has an ROCE of 12%. In absolute terms, that's a satisfactory return, but compared to the Electronic industry average of 7.0% it's much better.

See our latest analysis for Pacific Systems

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

How Are Returns Trending?

While the current returns on capital are decent, they haven't changed much. The company has consistently earned 12% for the last five years, and the capital employed within the business has risen 48% in that time. 12% is a pretty standard return, and it provides some comfort knowing that Pacific Systems has consistently earned this amount. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.

The Key Takeaway

The main thing to remember is that Pacific Systems has proven its ability to continually reinvest at respectable rates of return. Therefore it's no surprise that shareholders have earned a respectable 79% return if they held over the last five years. So even though the stock might be more "expensive" than it was before, we think the strong fundamentals warrant this stock for further research.

Pacific Systems does have some risks though, and we've spotted 4 warning signs for Pacific Systems that you might be interested in.

While Pacific Systems may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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This article by Simply Wall St is general in nature. 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.
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