Some Investors May Be Worried About SMC's (TSE:6273) Returns On Capital

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. In light of that, when we looked at SMC (TSE:6273) and its ROCE trend, we weren't exactly thrilled.

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 SMC, this is the formula:

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

0.099 = JP¥191b ÷ (JP¥2.1t - JP¥144b) (Based on the trailing twelve months to September 2024).

Thus, SMC has an ROCE of 9.9%. In absolute terms, that's a low return, but it's much better than the Machinery industry average of 7.9%.

View our latest analysis for SMC

Above you can see how the current ROCE for SMC 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 SMC .

What Does the ROCE Trend For SMC Tell Us?

On the surface, the trend of ROCE at SMC doesn't inspire confidence. Around five years ago the returns on capital were 12%, but since then they've fallen to 9.9%. 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 may take some time before the company starts to see any change in earnings from these investments.

In Conclusion...

Bringing it all together, while we're somewhat encouraged by SMC's reinvestment in its own business, we're aware that returns are shrinking. And with the stock having returned a mere 37% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

SMC could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation for 6273 on our platform quite valuable.

While SMC 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.