Mitsuboshi (TSE:5820) Is Reinvesting At Lower Rates Of Return

There are a few key trends to look for if we want to identify the next multi-bagger. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding 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. However, after briefly looking over the numbers, we don't think Mitsuboshi (TSE:5820) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Mitsuboshi, this is the formula:

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

0.0069 = JP¥61m ÷ (JP¥12b - JP¥3.4b) (Based on the trailing twelve months to December 2023).

Thus, Mitsuboshi has an ROCE of 0.7%. In absolute terms, that's a low return and it also under-performs the Electrical industry average of 8.5%.

Check out our latest analysis for Mitsuboshi

Historical performance is a great place to start when researching a stock so above you can see the gauge for Mitsuboshi's ROCE against it's prior returns. If you're interested in investigating Mitsuboshi's past further, check out this free graph covering Mitsuboshi's past earnings, revenue and cash flow.

So How Is Mitsuboshi's ROCE Trending?

When we looked at the ROCE trend at Mitsuboshi, we didn't gain much confidence. To be more specific, ROCE has fallen from 3.9% over the last five years. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

What We Can Learn From Mitsuboshi's ROCE

Bringing it all together, while we're somewhat encouraged by Mitsuboshi's reinvestment in its own business, we're aware that returns are shrinking. Yet to long term shareholders the stock has gifted them an incredible 245% return in the last five years, so the market appears to be rosy about its future. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

If you want to know some of the risks facing Mitsuboshi we've found 3 warning signs (1 doesn't sit too well with us!) that you should be aware of before investing here.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.