Did you know there are some financial metrics that can provide clues of a potential 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Speaking of which, we noticed some great changes in JAKKS Pacific's (NASDAQ:JAKK) returns on capital, so let's have a look.

Understanding Return On Capital Employed (ROCE)

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. Analysts use this formula to calculate it for JAKKS Pacific:

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

0.20 = US$42m ÷ (US$324m - US$113m) (Based on the trailing twelve months to March 2024).

Therefore, JAKKS Pacific has an ROCE of 20%. In absolute terms that's a great return and it's even better than the Leisure industry average of 16%.

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 for free.

What Can We Tell From JAKKS Pacific's ROCE Trend?

Shareholders will be relieved that JAKKS Pacific has broken into profitability. The company now earns 20% on its capital, because five years ago it was incurring losses. On top of that, what's interesting is that the amount of capital being employed has remained steady, so the business hasn't needed to put any additional money to work to generate these higher returns. So while we're happy that the business is more efficient, just keep in mind that could mean that going forward the business is lacking areas to invest internally for growth. Because in the end, a business can only get so efficient.

What We Can Learn From JAKKS Pacific's ROCE

In summary, we're delighted to see that JAKKS Pacific has been able to increase efficiencies and earn higher rates of return on the same amount of capital. And with a respectable 80% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. Therefore, we think it would be worth your time to check if these trends are going to continue.

On a final note, we've found 3 warning signs for JAKKS Pacific that we think you should be aware of.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning 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.