Some Investors May Be Worried About Obayashi's (TSE:1802) Returns On Capital

There are a few key trends to look for if we want to identify the next multi-bagger. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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. Although, when we looked at Obayashi (TSE:1802), it didn't seem to tick all of these boxes.

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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. To calculate this metric for Obayashi, this is the formula:

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

0.09 = JP¥143b ÷ (JP¥3.0t - JP¥1.5t) (Based on the trailing twelve months to March 2025).

Thus, Obayashi has an ROCE of 9.0%. On its own that's a low return on capital but it's in line with the industry's average returns of 9.2%.

View our latest analysis for Obayashi

In the above chart we have measured Obayashi's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Obayashi for free.

What Does the ROCE Trend For Obayashi Tell Us?

When we looked at the ROCE trend at Obayashi, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 9.0% from 13% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

On a side note, Obayashi's current liabilities are still rather high at 48% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

What We Can Learn From Obayashi's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Obayashi is reinvesting for growth and has higher sales as a result. And long term investors must be optimistic going forward because the stock has returned a huge 160% to shareholders in the last five years. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

One more thing: We've identified 3 warning signs with Obayashi (at least 1 which is significant) , and understanding them would certainly be useful.

While Obayashi 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.