Investors Met With Slowing Returns on Capital At Makita (TSE:6586)

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So, when we ran our eye over Makita's (TSE:6586) trend of ROCE, we liked what we saw.

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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 Makita is:

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

0.10 = JP¥100b ÷ (JP¥1.1t - JP¥138b) (Based on the trailing twelve months to December 2024).

Thus, Makita has an ROCE of 10%. On its own, that's a standard return, however it's much better than the 7.8% generated by the Machinery industry.

View our latest analysis for Makita

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

What Can We Tell From Makita's ROCE Trend?

The trend of ROCE doesn't stand out much, but returns on a whole are decent. The company has consistently earned 10% for the last five years, and the capital employed within the business has risen 58% in that time. 10% is a pretty standard return, and it provides some comfort knowing that Makita has consistently earned this amount. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.

What We Can Learn From Makita's ROCE

In the end, Makita has proven its ability to adequately reinvest capital at good rates of return. And given the stock has only risen 35% over the last five years, we'd suspect the market is beginning to recognize these trends. So to determine if Makita is a multi-bagger going forward, we'd suggest digging deeper into the company's other fundamentals.

On a final note, we've found 1 warning sign for Makita that we think you should be aware of.

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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.