Takeda Machinery (TSE:6150) Could Be Struggling To Allocate Capital

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. However, after investigating Takeda Machinery (TSE:6150), we don't think it's current trends fit the mold of a multi-bagger.

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Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Takeda Machinery is:

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

0.10 = JP¥581m ÷ (JP¥7.7b - JP¥1.9b) (Based on the trailing twelve months to November 2024).

Therefore, Takeda Machinery has an ROCE of 10.0%. In absolute terms, that's a low return, but it's much better than the Machinery industry average of 7.8%.

Check out our latest analysis for Takeda Machinery

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Takeda Machinery has performed in the past in other metrics, you can view this free graph of Takeda Machinery's past earnings, revenue and cash flow .

What Can We Tell From Takeda Machinery's ROCE Trend?

In terms of Takeda Machinery's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 16%, but since then they've fallen to 10.0%. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

The Bottom Line On Takeda Machinery's ROCE

Bringing it all together, while we're somewhat encouraged by Takeda Machinery's reinvestment in its own business, we're aware that returns are shrinking. Since the stock has gained an impressive 87% over the last five years, investors must think there's better things to come. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

If you'd like to know about the risks facing Takeda Machinery, we've discovered 2 warning signs that you should be aware of.

While Takeda Machinery 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.