Will The ROCE Trend At Japan Logistic Systems (TYO:9060) Continue?

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Speaking of which, we noticed some great changes in Japan Logistic Systems' (TYO:9060) returns on capital, so let's have a look.

What is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Japan Logistic Systems, this is the formula:

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

0.037 = JP¥945m ÷ (JP¥39b - JP¥13b) (Based on the trailing twelve months to September 2020).

Thus, Japan Logistic Systems has an ROCE of 3.7%. In absolute terms, that's a low return and it also under-performs the Transportation industry average of 4.9%.

See our latest analysis for Japan Logistic Systems

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 Japan Logistic Systems has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is Japan Logistic Systems' ROCE Trending?

Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. The figures show that over the last five years, ROCE has grown 229% whilst employing roughly the same amount of capital. 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. 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.

What We Can Learn From Japan Logistic Systems' ROCE

To bring it all together, Japan Logistic Systems has done well to increase the returns it's generating from its capital employed. Since the stock has only returned 33% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.

Japan Logistic Systems does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those shouldn't be ignored...

While Japan Logistic Systems 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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