Returns On Capital - An Important Metric For Techno HorizonLtd (TYO:6629)

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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. With that in mind, we've noticed some promising trends at Techno HorizonLtd (TYO:6629) so let's look a bit deeper.

Understanding 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. The formula for this calculation on Techno HorizonLtd is:

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

0.083 = JP¥792m ÷ (JP¥25b - JP¥16b) (Based on the trailing twelve months to September 2020).

Therefore, Techno HorizonLtd has an ROCE of 8.3%. In absolute terms, that's a low return but it's around the Electronic industry average of 7.0%.

See our latest analysis for Techno HorizonLtd

In the above chart we have measured Techno HorizonLtd'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 Techno HorizonLtd here for free.

How Are Returns Trending?

Shareholders will be relieved that Techno HorizonLtd has broken into profitability. While the business was unprofitable in the past, it's now turned things around and is earning 8.3% on its capital. Interestingly, the capital employed by the business has remained relatively flat, so these higher returns are either from prior investments paying off or increased efficiencies. So while we're happy that the business is more efficient, just keep in mind that could mean that going forward the business is lacking areas to invest internally for growth. Because in the end, a business can only get so efficient.

On a separate but related note, it's important to know that Techno HorizonLtd has a current liabilities to total assets ratio of 62%, which we'd consider pretty high. 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...

To sum it up, Techno HorizonLtd is collecting higher returns from the same amount of capital, and that's impressive. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

One final note, you should learn about the 3 warning signs we've spotted with Techno HorizonLtd (including 1 which is concerning) .

While Techno HorizonLtd 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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