Kura Sushi Asia (GTSM:2754) Shareholders Will Want The ROCE Trajectory To Continue

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. With that in mind, we've noticed some promising trends at Kura Sushi Asia (GTSM:2754) so let's look a bit deeper.

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. Analysts use this formula to calculate it for Kura Sushi Asia:

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

0.02 = NT$51m ÷ (NT$3.1b - NT$517m) (Based on the trailing twelve months to December 2020).

Therefore, Kura Sushi Asia has an ROCE of 2.0%. In absolute terms, that's a low return and it also under-performs the Hospitality industry average of 5.6%.

Check out our latest analysis for Kura Sushi Asia

In the above chart we have measured Kura Sushi Asia's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Can We Tell From Kura Sushi Asia's ROCE Trend?

We're delighted to see that Kura Sushi Asia is reaping rewards from its investments and is now generating some pre-tax profits. About four years ago the company was generating losses but things have turned around because it's now earning 2.0% on its capital. Not only that, but the company is utilizing 717% more capital than before, but that's to be expected from a company trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

In Conclusion...

Overall, Kura Sushi Asia gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. Since the stock has returned a solid 25% to shareholders over the last year, it's fair to say investors are beginning to recognize these changes. In light of that, we think it's worth looking further into this stock because if Kura Sushi Asia can keep these trends up, it could have a bright future ahead.

Kura Sushi Asia does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those shouldn't be ignored...

While Kura Sushi Asia 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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