PKSHA Technology (TSE:3993) needs to do more to multiply its value in the future

When we want to find a potential multi-bagger, there are often underlying trends that can provide clues. Usually we want to identify a trend of growth to return on the capital employed (ROCE) and in parallel a growing base of the capital employed. Ultimately, this shows that this is a company that reinvests profits with increasing returns. Against this background, we have PKSHA technology (TSE:3993) and its ROCE development, we were not exactly thrilled.

Understanding Return on Capital Employed (ROCE)

For those who don’t know what ROCE is, it measures the amount of pre-tax profit a company can generate with the capital employed in its business. Analysts use this formula to calculate it for PKSHA Technology:

Return on capital = earnings before interest and taxes (EBIT) ÷ (total assets – current liabilities)

0.083 = JP¥2.8 billion ÷ (JP¥39 billion – JP¥4.9 billion) (Based on the last twelve months to March 2024).

Therefore, PKSHA Technology has a ROCE of 8.3%. In absolute terms, this is a low return and it is also below the industry average of 15% in the software industry.

Check out our latest analysis for PKSHA Technology

In the chart above, we have compared PKSHA Technology’s past ROCE with its past performance, but the future is arguably more important. If you are interested, you can see analyst forecasts in our free Analyst report for PKSHA Technology.

What the ROCE trend can tell us

As for PKSHA Technology’s historical ROCE trend, it is not particularly noteworthy. Over the past five years, ROCE has remained relatively stable at around 8.3% and the company has invested 417% more capital into its operations. Given that the company has increased the amount of capital employed, the investments made simply do not seem to offer a high return on investment.

The most important things to take away

In short, although PKSHA Technology has reinvested its capital, the returns it has generated have not increased. And investors seem to doubt that the trend will continue, as the stock has fallen 47% over the past five years. In any case, the stock does not exhibit the characteristics of a multibagger described above, so if that is what you are looking for, we think you will have better luck elsewhere.

And we discovered something else 1 warning sign with PKSHA technology that you may find interesting.

If you want to look for solid companies with high returns, check out this free List of companies with good balance sheets and impressive return on equity.

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