If you're looking for a multi-bagger, there's a few things to keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, the ROCE of Subaru (TSE:7270) looks decent, right now, so lets see what the trend of returns can tell us.
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. The formula for this calculation on Subaru is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.13 = JP¥429b ÷ (JP¥4.4t - JP¥1.1t) (Based on the trailing twelve months to December 2023).
Thus, Subaru has an ROCE of 13%. That's a relatively normal return on capital, and it's around the 12% generated by the Auto industry.
See our latest analysis for Subaru
In the above chart we have measured Subaru's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Subaru .
How Are Returns Trending?
The trend of ROCE doesn't stand out much, but returns on a whole are decent. The company has employed 75% more capital in the last five years, and the returns on that capital have remained stable at 13%. Since 13% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.
The Key Takeaway
In the end, Subaru has proven its ability to adequately reinvest capital at good rates of return. In light of this, the stock has only gained 37% over the last five years for shareholders who have owned the stock in this period. So to determine if Subaru is a multi-bagger going forward, we'd suggest digging deeper into the company's other fundamentals.
Like most companies, Subaru does come with some risks, and we've found 1 warning sign that you should be aware of.
While Subaru 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:7270
Subaru
Manufactures and sells automobiles and aerospace products in Japan, rest of Asia, North America, Europe, and internationally.
Undervalued with solid track record and pays a dividend.
