If we want to find a stock that could multiply over the long term, what are the underlying trends we should look 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. 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 when we looked at the ROCE trend of Morimatsu International Holdings (HKG:2155) we really liked what we saw.
Understanding 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. Analysts use this formula to calculate it for Morimatsu International Holdings:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.23 = CN¥965m ÷ (CN¥9.0b - CN¥4.7b) (Based on the trailing twelve months to June 2023).
Therefore, Morimatsu International Holdings has an ROCE of 23%. In absolute terms that's a great return and it's even better than the Machinery industry average of 7.1%.
View our latest analysis for Morimatsu International Holdings
In the above chart we have measured Morimatsu International Holdings' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Morimatsu International Holdings.
What Can We Tell From Morimatsu International Holdings' ROCE Trend?
The trends we've noticed at Morimatsu International Holdings are quite reassuring. The data shows that returns on capital have increased substantially over the last five years to 23%. 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 186%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.
On a separate but related note, it's important to know that Morimatsu International Holdings has a current liabilities to total assets ratio of 53%, which we'd consider pretty high. 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. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.
All in all, it's terrific to see that Morimatsu International Holdings is reaping the rewards from prior investments and is growing its capital base. And since the stock has fallen 34% over the last year, there might be an opportunity here. With that in mind, we believe the promising trends warrant this stock for further investigation.
Morimatsu International Holdings does have some risks, we noticed 2 warning signs (and 1 which is significant) we think you should know about.
Morimatsu International Holdings 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.