What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. So on that note, Niraku GC Holdings (HKG:1245) 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 Niraku GC Holdings, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.057 = JP¥3.0b ÷ (JP¥66b - JP¥14b) (Based on the trailing twelve months to March 2024).
Thus, Niraku GC Holdings has an ROCE of 5.7%. In absolute terms, that's a low return but it's around the Hospitality industry average of 6.6%.
View our latest analysis for Niraku GC Holdings
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 Niraku GC Holdings has performed in the past in other metrics, you can view this free graph of Niraku GC Holdings' past earnings, revenue and cash flow.
What The Trend Of ROCE Can Tell Us
Niraku GC Holdings has not disappointed with their ROCE growth. The figures show that over the last five years, ROCE has grown 60% whilst employing roughly the same amount of capital. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.
The Bottom Line On Niraku GC Holdings' ROCE
To bring it all together, Niraku GC Holdings has done well to increase the returns it's generating from its capital employed. Given the stock has declined 46% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. With that in mind, we believe the promising trends warrant this stock for further investigation.
Like most companies, Niraku GC Holdings does come with some risks, and we've found 3 warning signs that you should be aware of.
While Niraku GC Holdings 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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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.