The Returns At Hitachi Construction Machinery (TSE:6305) Aren't Growing

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. With that in mind, the ROCE of Hitachi Construction Machinery (TSE:6305) looks decent, right now, so lets see what the trend of returns can tell us.

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. To calculate this metric for Hitachi Construction Machinery, this is the formula:

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

0.14 = JP¥157b ÷ (JP¥1.8t - JP¥610b) (Based on the trailing twelve months to September 2024).

So, Hitachi Construction Machinery has an ROCE of 14%. On its own, that's a standard return, however it's much better than the 7.9% generated by the Machinery industry.

Check out our latest analysis for Hitachi Construction Machinery

Above you can see how the current ROCE for Hitachi Construction Machinery compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Hitachi Construction Machinery for free.

What Does the ROCE Trend For Hitachi Construction Machinery Tell Us?

While the current returns on capital are decent, they haven't changed much. Over the past five years, ROCE has remained relatively flat at around 14% and the business has deployed 54% more capital into its operations. Since 14% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.

What We Can Learn From Hitachi Construction Machinery's ROCE

The main thing to remember is that Hitachi Construction Machinery has proven its ability to continually reinvest at respectable rates of return. However, over the last five years, the stock has only delivered a 18% return to shareholders who held over that period. That's why it could be worth your time looking into this stock further to discover if it has more traits of a multi-bagger.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for Hitachi Construction Machinery (of which 1 is significant!) that you should know about.

While Hitachi Construction Machinery isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.