Broad EnterpriseLtd (TSE:4415) Knows How To Allocate Capital Effectively

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. And in light of that, the trends we're seeing at Broad EnterpriseLtd's (TSE:4415) look very promising so lets take a look.

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. To calculate this metric for Broad EnterpriseLtd, this is the formula:

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

0.29 = JP¥697m ÷ (JP¥7.3b - JP¥4.9b) (Based on the trailing twelve months to June 2024).

Therefore, Broad EnterpriseLtd has an ROCE of 29%. That's a fantastic return and not only that, it outpaces the average of 21% earned by companies in a similar industry.

View our latest analysis for Broad EnterpriseLtd

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

What Does the ROCE Trend For Broad EnterpriseLtd Tell Us?

We like the trends that we're seeing from Broad EnterpriseLtd. Over the last four years, returns on capital employed have risen substantially to 29%. 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 102%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Effectively this means that suppliers or short-term creditors are now funding 67% of the business, which is more than it was four years ago. And with current liabilities at those levels, that's pretty high.

Our Take On Broad EnterpriseLtd's ROCE

All in all, it's terrific to see that Broad EnterpriseLtd is reaping the rewards from prior investments and is growing its capital base. Astute investors may have an opportunity here because the stock has declined 11% in the last year. So researching this company further and determining whether or not these trends will continue seems justified.

If you'd like to know more about Broad EnterpriseLtd, we've spotted 4 warning signs, and 1 of them can't be ignored.

Broad EnterpriseLtd is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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.