Is There More Growth In Store For Odawara Engineering's (TYO:6149) Returns On Capital?

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. So on that note, Odawara Engineering (TYO:6149) looks quite promising in regards to its trends of return on capital.

Return On Capital Employed (ROCE): What is it?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Odawara Engineering is:

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

0.089 = JP¥1.2b ÷ (JP¥21b - JP¥8.0b) (Based on the trailing twelve months to September 2020).

Thus, Odawara Engineering has an ROCE of 8.9%. In absolute terms, that's a low return, but it's much better than the Machinery industry average of 6.5%.

Check out our latest analysis for Odawara Engineering

Above you can see how the current ROCE for Odawara Engineering 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 Odawara Engineering here for free.

What Can We Tell From Odawara Engineering's ROCE Trend?

We're glad to see that ROCE is heading in the right direction, even if it is still low at the moment. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 8.9%. Basically the business is earning more per dollar of capital invested and in addition to that, 46% 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.

The Bottom Line On Odawara Engineering's ROCE

To sum it up, Odawara Engineering has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And a remarkable 532% total return over the last five years tells us that investors are expecting more good things to come in the future. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

Odawara Engineering does have some risks though, and we've spotted 1 warning sign for Odawara Engineering that you might be interested in.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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