Takachiho KohekiLtd (TSE:2676) Is Experiencing Growth In Returns On Capital

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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So on that note, Takachiho KohekiLtd (TSE:2676) looks quite promising in regards to its trends of return on capital.

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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. To calculate this metric for Takachiho KohekiLtd, this is the formula:

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

0.11 = JP¥1.8b ÷ (JP¥22b - JP¥5.2b) (Based on the trailing twelve months to December 2024).

Thus, Takachiho KohekiLtd has an ROCE of 11%. That's a relatively normal return on capital, and it's around the 9.0% generated by the Electronic industry.

See our latest analysis for Takachiho KohekiLtd

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Takachiho KohekiLtd has performed in the past in other metrics, you can view this free graph of Takachiho KohekiLtd's past earnings, revenue and cash flow.

How Are Returns Trending?

Takachiho KohekiLtd has not disappointed with their ROCE growth. The figures show that over the last five years, ROCE has grown 45% whilst employing roughly the same amount of capital. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.

In Conclusion...

As discussed above, Takachiho KohekiLtd appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. Since the stock has returned a staggering 393% 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 Takachiho KohekiLtd can keep these trends up, it could have a bright future ahead.

One more thing, we've spotted 1 warning sign facing Takachiho KohekiLtd that you might find interesting.

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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.