Kaori Heat Treatment's (TWSE:8996) Returns On Capital Are Heading Higher

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. So on that note, Kaori Heat Treatment (TWSE:8996) looks quite promising in regards to its trends of return on capital.

Return On Capital Employed (ROCE): What Is It?

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 Kaori Heat Treatment, this is the formula:

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

0.18 = NT$645m ÷ (NT$4.6b - NT$1.0b) (Based on the trailing twelve months to March 2024).

Therefore, Kaori Heat Treatment has an ROCE of 18%. In absolute terms, that's a satisfactory return, but compared to the Machinery industry average of 8.4% it's much better.

Check out our latest analysis for Kaori Heat Treatment

In the above chart we have measured Kaori Heat Treatment's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Kaori Heat Treatment for free.

What The Trend Of ROCE Can Tell Us

The trends we've noticed at Kaori Heat Treatment are quite reassuring. Over the last five years, returns on capital employed have risen substantially to 18%. Basically the business is earning more per dollar of capital invested and in addition to that, 69% more capital is being employed now too. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

The Bottom Line On Kaori Heat Treatment's ROCE

All in all, it's terrific to see that Kaori Heat Treatment is reaping the rewards from prior investments and is growing its capital base. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

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

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.

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