Why The 35% Return On Capital At Forval TelecomInc (TSE:9445) Should Have Your Attention

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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, the ROCE of Forval TelecomInc (TSE:9445) looks great, so lets see what the trend can tell us.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Forval TelecomInc:

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

0.35 = JP¥1.1b ÷ (JP¥10.0b - JP¥6.9b) (Based on the trailing twelve months to June 2024).

So, Forval TelecomInc has an ROCE of 35%. That's a fantastic return and not only that, it outpaces the average of 19% earned by companies in a similar industry.

View our latest analysis for Forval TelecomInc

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

What The Trend Of ROCE Can Tell Us

Forval TelecomInc's ROCE growth is quite impressive. The figures show that over the last five years, ROCE has grown 23% whilst employing roughly the same amount of capital. So it's likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn't changed considerably. 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.

On a side note, Forval TelecomInc's current liabilities are still rather high at 69% of total assets. 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.

What We Can Learn From Forval TelecomInc's ROCE

In summary, we're delighted to see that Forval TelecomInc has been able to increase efficiencies and earn higher rates of return on the same amount of capital. Since the stock has only returned 37% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.

If you want to continue researching Forval TelecomInc, you might be interested to know about the 1 warning sign that our analysis has discovered.

High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.

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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.