If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Although, when we looked at DENSO (TSE:6902), it didn't seem to tick all of these boxes.
Return On Capital Employed (ROCE): What Is It?
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 DENSO:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.06 = JP¥407b ÷ (JP¥8.9t - JP¥2.1t) (Based on the trailing twelve months to June 2024).
Thus, DENSO has an ROCE of 6.0%. Even though it's in line with the industry average of 6.2%, it's still a low return by itself.
View our latest analysis for DENSO
Above you can see how the current ROCE for DENSO compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for DENSO .
What Does the ROCE Trend For DENSO Tell Us?
There are better returns on capital out there than what we're seeing at DENSO. Over the past five years, ROCE has remained relatively flat at around 6.0% and the business has deployed 50% more capital into its operations. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.
What We Can Learn From DENSO's ROCE
As we've seen above, DENSO's returns on capital haven't increased but it is reinvesting in the business. Since the stock has gained an impressive 94% over the last five years, investors must think there's better things to come. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.
While DENSO doesn't shine too bright in this respect, it's still worth seeing if the company is trading at attractive prices. You can find that out with our FREE intrinsic value estimation for 6902 on our platform.
While DENSO isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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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.
About TSE:6902
DENSO
Engages in the manufacture and sale of automotive parts in Japan, rest of Asia, North America, Europe, and internationally.
Excellent balance sheet established dividend payer.
