Futaba Industrial's (TSE:7241) Returns On Capital Are Heading Higher

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. Speaking of which, we noticed some great changes in Futaba Industrial's (TSE:7241) returns on capital, so let's have a look.

What Is Return On Capital Employed (ROCE)?

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. To calculate this metric for Futaba Industrial, this is the formula:

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

0.12 = JP¥21b ÷ (JP¥323b - JP¥138b) (Based on the trailing twelve months to December 2023).

So, Futaba Industrial has an ROCE of 12%. On its own, that's a standard return, however it's much better than the 7.1% generated by the Auto Components industry.

See our latest analysis for Futaba Industrial

Above you can see how the current ROCE for Futaba Industrial 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 Futaba Industrial for free.

What Can We Tell From Futaba Industrial's ROCE Trend?

Investors would be pleased with what's happening at Futaba Industrial. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 12%. Basically the business is earning more per dollar of capital invested and in addition to that, 31% more capital is being employed now too. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

On a separate but related note, it's important to know that Futaba Industrial has a current liabilities to total assets ratio of 43%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

Our Take On Futaba Industrial's ROCE

All in all, it's terrific to see that Futaba Industrial is reaping the rewards from prior investments and is growing its capital base. And a remarkable 139% total return over the last five years tells us that investors are expecting more good things to come in the future. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

On the other side of ROCE, we have to consider valuation. That's why we have a FREE intrinsic value estimation for 7241 on our platform that is definitely worth checking out.

While Futaba Industrial may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.