We Like These Underlying Return On Capital Trends At Japan Steel Works (TSE:5631)

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. So on that note, Japan Steel Works (TSE:5631) looks quite promising in regards to its trends of return on capital.

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Understanding Return On Capital Employed (ROCE)

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 Japan Steel Works, this is the formula:

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

0.093 = JP¥24b ÷ (JP¥396b - JP¥141b) (Based on the trailing twelve months to June 2025).

Thus, Japan Steel Works has an ROCE of 9.3%. Even though it's in line with the industry average of 8.6%, it's still a low return by itself.

View our latest analysis for Japan Steel Works

Above you can see how the current ROCE for Japan Steel Works 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 Japan Steel Works .

What Does the ROCE Trend For Japan Steel Works Tell Us?

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 9.3%. Basically the business is earning more per dollar of capital invested and in addition to that, 26% more capital is being employed now too. So we're very much inspired by what we're seeing at Japan Steel Works thanks to its ability to profitably reinvest capital.

The Key Takeaway

In summary, it's great to see that Japan Steel Works can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. And a remarkable 428% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if Japan Steel Works can keep these trends up, it could have a bright future ahead.

One more thing, we've spotted 1 warning sign facing Japan Steel Works that you might find interesting.

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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.