Returns on Capital Paint A Bright Future For Inforich (TSE:9338)

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. With that in mind, the ROCE of Inforich (TSE:9338) looks great, so lets see what the trend can tell us.

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

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Inforich, this is the formula:

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

0.22 = JP¥989m ÷ (JP¥11b - JP¥6.7b) (Based on the trailing twelve months to June 2024).

Thus, Inforich has an ROCE of 22%. In absolute terms that's a great return and it's even better than the Consumer Services industry average of 8.7%.

See our latest analysis for Inforich

Above you can see how the current ROCE for Inforich compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Inforich .

What Does the ROCE Trend For Inforich Tell Us?

We're delighted to see that Inforich is reaping rewards from its investments and is now generating some pre-tax profits. About three years ago the company was generating losses but things have turned around because it's now earning 22% on its capital. In addition to that, Inforich is employing 38% more capital than previously which is expected of a company that's trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Effectively this means that suppliers or short-term creditors are now funding 60% of the business, which is more than it was three years ago. And with current liabilities at those levels, that's pretty high.

Our Take On Inforich's ROCE

Overall, Inforich gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. And given the stock has remained rather flat over the last year, there might be an opportunity here if other metrics are strong. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

Inforich does have some risks, we noticed 2 warning signs (and 1 which is significant) we think you should know about.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets 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.