If you’re looking for a multi-bagger, there’s a few things to keep an eye out for. In a perfect world, we’d like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, we’ve noticed some promising trends at Internet Initiative Japan (TSE:3774) so let’s look a bit deeper.

What Is Return On Capital Employed (ROCE)?

For those that aren’t sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Internet Initiative Japan:

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

0.17 = JP¥29b ÷ (JP¥274b – JP¥98b) (Based on the trailing twelve months to March 2024).

Therefore, Internet Initiative Japan has an ROCE of 17%. In absolute terms, that’s a pretty normal return, and it’s somewhat close to the Telecom industry average of 19%.

Check out our latest analysis for Internet Initiative Japan

roce
TSE:3774 Return on Capital Employed June 27th 2024

In the above chart we have measured Internet Initiative Japan’s 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 analyst report for Internet Initiative Japan .

So How Is Internet Initiative Japan’s ROCE Trending?

Internet Initiative Japan is displaying some positive trends. Over the last five years, returns on capital employed have risen substantially to 17%. Basically the business is earning more per dollar of capital invested and in addition to that, 53% 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.

What We Can Learn From Internet Initiative Japan’s ROCE

In summary, it’s great to see that Internet Initiative Japan can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. Since the stock has returned a staggering 372% to shareholders over the last five years, it looks like investors are recognizing these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

One more thing to note, we’ve identified 1 warning sign with Internet Initiative Japan and understanding it should be part of your investment process.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

Valuation is complex, but we’re helping make it simple.

Find out whether Internet Initiative Japan is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

View the Free Analysis

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.

Valuation is complex, but we’re helping make it simple.

Find out whether Internet Initiative Japan is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

View the Free Analysis

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com

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