Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. With that in mind, the ROCE of JAKKS Pacific (NASDAQ:JAKK) looks great, so lets see what the trend can tell us.
Return On Capital Employed (ROCE): What is it?
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. The formula for this calculation on JAKKS Pacific is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.29 = US$36m ÷ (US$315m - US$193m) (Based on the trailing twelve months to June 2021).
Thus, JAKKS Pacific has an ROCE of 29%. In absolute terms that's a great return and it's even better than the Leisure industry average of 24%.
Above you can see how the current ROCE for JAKKS Pacific compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering JAKKS Pacific here for free.
What Does the ROCE Trend For JAKKS Pacific Tell Us?
JAKKS Pacific has not disappointed in regards to ROCE growth. The data shows that returns on capital have increased by 334% over the trailing five years. The company is now earning US$0.3 per dollar of capital employed. In regards to capital employed, JAKKS Pacific appears to been achieving more with less, since the business is using 64% less capital to run its operation. A business that's shrinking its asset base like this isn't usually typical of a soon to be multi-bagger company.
On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Effectively this means that suppliers or short-term creditors are now funding 61% of the business, which is more than it was five years ago. And with current liabilities at those levels, that's pretty high.
In Conclusion...
In a nutshell, we're pleased to see that JAKKS Pacific has been able to generate higher returns from less capital. Although the company may be facing some issues elsewhere since the stock has plunged 85% in the last five years. Regardless, we think the underlying fundamentals warrant this stock for further investigation.
JAKKS Pacific does have some risks, we noticed 3 warning signs (and 2 which make us uncomfortable) 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.
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.
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