Return Trends At Howa Machinery (TSE:6203) Aren't Appealing

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. Having said that, from a first glance at Howa Machinery (TSE:6203) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

We've discovered 3 warning signs about Howa Machinery. View them for free.

What Is 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. The formula for this calculation on Howa Machinery is:

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

0.048 = JP¥1.2b ÷ (JP¥33b - JP¥7.4b) (Based on the trailing twelve months to December 2024).

Thus, Howa Machinery has an ROCE of 4.8%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 7.9%.

See our latest analysis for Howa Machinery

In the above chart we have measured Howa Machinery's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Howa Machinery .

What The Trend Of ROCE Can Tell Us

In terms of Howa Machinery's historical ROCE trend, it doesn't exactly demand attention. The company has consistently earned 4.8% for the last five years, and the capital employed within the business has risen 38% in that time. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

In Conclusion...

In summary, Howa Machinery has simply been reinvesting capital and generating the same low rate of return as before. Unsurprisingly, the stock has only gained 36% over the last five years, which potentially indicates that investors are accounting for this going forward. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

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

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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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.