Mabuchi Motor (TSE:6592) Could Be Struggling To Allocate 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. 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. In light of that, when we looked at Mabuchi Motor (TSE:6592) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Mabuchi Motor, this is the formula:

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

0.06 = JP¥20b ÷ (JP¥367b - JP¥26b) (Based on the trailing twelve months to June 2024).

Thus, Mabuchi Motor has an ROCE of 6.0%. In absolute terms, that's a low return and it also under-performs the Electrical industry average of 8.2%.

View our latest analysis for Mabuchi Motor

Above you can see how the current ROCE for Mabuchi Motor compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Mabuchi Motor .

What Does the ROCE Trend For Mabuchi Motor Tell Us?

When we looked at the ROCE trend at Mabuchi Motor, we didn't gain much confidence. To be more specific, ROCE has fallen from 7.6% over the last five years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

The Bottom Line On Mabuchi Motor's ROCE

While returns have fallen for Mabuchi Motor in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. These trends are starting to be recognized by investors since the stock has delivered a 23% gain to shareholders who've held over the last five years. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.

If you want to know some of the risks facing Mabuchi Motor we've found 2 warning signs (1 is a bit unpleasant!) that you should be aware of before investing here.

While Mabuchi Motor 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.