Returns On Capital Signal Tricky Times Ahead For Sawafuji ElectricLtd (TSE:6901)

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at Sawafuji ElectricLtd (TSE:6901) and its ROCE trend, we weren't exactly thrilled.

Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Sawafuji ElectricLtd is:

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

0.034 = JP¥563m ÷ (JP¥27b - JP¥10b) (Based on the trailing twelve months to March 2024).

Therefore, Sawafuji ElectricLtd has an ROCE of 3.4%. In absolute terms, that's a low return and it also under-performs the Electrical industry average of 8.4%.

Check out our latest analysis for Sawafuji ElectricLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Sawafuji ElectricLtd's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Sawafuji ElectricLtd.

How Are Returns Trending?

When we looked at the ROCE trend at Sawafuji ElectricLtd, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 3.4% from 6.2% five years ago. However it looks like Sawafuji ElectricLtd might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

What We Can Learn From Sawafuji ElectricLtd's ROCE

In summary, Sawafuji ElectricLtd is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And in the last five years, the stock has given away 39% so the market doesn't look too hopeful on these trends strengthening any time soon. Therefore based on the analysis done in this article, we don't think Sawafuji ElectricLtd has the makings of a multi-bagger.

Sawafuji ElectricLtd does have some risks though, and we've spotted 2 warning signs for Sawafuji ElectricLtd that you might be interested in.

While Sawafuji ElectricLtd 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com