Okano Valve Mfg.Co.Ltd (TSE:6492) Is Experiencing Growth In Returns On Capital

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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Speaking of which, we noticed some great changes in Okano Valve Mfg.Co.Ltd's (TSE:6492) returns on capital, so let's have a look.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Okano Valve Mfg.Co.Ltd is:

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

0.12 = JP¥1.4b ÷ (JP¥14b - JP¥1.7b) (Based on the trailing twelve months to May 2024).

So, Okano Valve Mfg.Co.Ltd has an ROCE of 12%. 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 Okano Valve Mfg.Co.Ltd

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're interested in investigating Okano Valve Mfg.Co.Ltd's past further, check out this free graph covering Okano Valve Mfg.Co.Ltd's past earnings, revenue and cash flow.

The Trend Of ROCE

Okano Valve Mfg.Co.Ltd has broken into the black (profitability) and we're sure it's a sight for sore eyes. The company was generating losses five years ago, but has managed to turn it around and as we saw earlier is now earning 12%, which is always encouraging. Interestingly, the capital employed by the business has remained relatively flat, so these higher returns are either from prior investments paying off or increased efficiencies. That being said, while an increase in efficiency is no doubt appealing, it'd be helpful to know if the company does have any investment plans going forward. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.

The Bottom Line

To bring it all together, Okano Valve Mfg.Co.Ltd has done well to increase the returns it's generating from its capital employed. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. In light of that, we think it's worth looking further into this stock because if Okano Valve Mfg.Co.Ltd can keep these trends up, it could have a bright future ahead.

On a final note, we've found 2 warning signs for Okano Valve Mfg.Co.Ltd that we think you should be aware of.

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.