Returns On Capital At Mabuchi Motor (TSE:6592) Paint A Concerning Picture

If you're looking for a multi-bagger, there's a few things to 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Although, when we looked at Mabuchi Motor (TSE:6592), it didn't seem to tick all of these boxes.

What Is 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 Mabuchi Motor, this is the formula:

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

0.049 = JP¥15b ÷ (JP¥337b - JP¥25b) (Based on the trailing twelve months to December 2023).

So, Mabuchi Motor has an ROCE of 4.9%. Ultimately, that's a low return and it under-performs the Electrical industry average of 8.5%.

View our latest analysis for Mabuchi Motor

In the above chart we have measured Mabuchi Motor's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Mabuchi Motor .

What The Trend Of ROCE Can Tell Us

In terms of Mabuchi Motor's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 4.9% from 8.5% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

What We Can Learn From Mabuchi Motor's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Mabuchi Motor is reinvesting for growth and has higher sales as a result. Furthermore the stock has climbed 49% over the last five years, it would appear that investors are upbeat about the future. So should these growth trends continue, we'd be optimistic on the stock going forward.

Mabuchi Motor does have some risks though, and we've spotted 1 warning sign for Mabuchi Motor that you might be interested in.

While Mabuchi Motor 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.