Returns Are Gaining Momentum At Rikei (TSE:8226)
There are a few key trends to look for if we want to identify the next multi-bagger. 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. Speaking of which, we noticed some great changes in Rikei's (TSE:8226) returns on capital, so let's have a look.
Understanding 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. To calculate this metric for Rikei, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.18 = JP¥1.1b ÷ (JP¥11b - JP¥5.2b) (Based on the trailing twelve months to September 2025).
So, Rikei has an ROCE of 18%. In absolute terms, that's a satisfactory return, but compared to the Electronic industry average of 9.2% it's much better.
See our latest analysis for Rikei
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 want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Rikei.
So How Is Rikei's ROCE Trending?
Rikei is displaying some positive trends. Over the last five years, returns on capital employed have risen substantially to 18%. The amount of capital employed has increased too, by 47%. So we're very much inspired by what we're seeing at Rikei thanks to its ability to profitably reinvest capital.
Another thing to note, Rikei has a high ratio of current liabilities to total assets of 45%. 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.
Our Take On Rikei's ROCE
To sum it up, Rikei has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. In light of that, we think it's worth looking further into this stock because if Rikei can keep these trends up, it could have a bright future ahead.
If you'd like to know more about Rikei, we've spotted 3 warning signs, and 2 of them are concerning.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
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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.