Should You Invest In NewtechLtd (TYO:6734)?

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. 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 NewtechLtd's (TYO:6734) 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. The formula for this calculation on NewtechLtd is:

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

0.24 = JP¥437m ÷ (JP¥3.2b - JP¥1.4b) (Based on the trailing twelve months to August 2020).

So, NewtechLtd has an ROCE of 24%. In absolute terms that's a great return and it's even better than the Tech industry average of 8.6%.

See our latest analysis for NewtechLtd

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

What The Trend Of ROCE Can Tell Us

NewtechLtd is showing promise given that its ROCE is trending up and to the right. More specifically, while the company has kept capital employed relatively flat over the last two years, the ROCE has climbed 45% in that same time. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.

On a separate but related note, it's important to know that NewtechLtd has a current liabilities to total assets ratio of 43%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Bottom Line

To bring it all together, NewtechLtd has done well to increase the returns it's generating from its capital employed. Since the stock has returned a staggering 463% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it's worth looking further into this stock because if NewtechLtd can keep these trends up, it could have a bright future ahead.

If you'd like to know about the risks facing NewtechLtd, we've discovered 2 warning signs that you should be aware of.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets 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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