IHI (TSE:7013) Is Experiencing Growth In Returns On Capital

There are a few key trends to look for if we want to identify the next multi-bagger. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, we've noticed some promising trends at IHI (TSE:7013) so let's look a bit deeper.

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. To calculate this metric for IHI, this is the formula:

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

0.16 = JP¥163b ÷ (JP¥2.1t - JP¥1.1t) (Based on the trailing twelve months to September 2024).

Therefore, IHI has an ROCE of 16%. In absolute terms, that's a satisfactory return, but compared to the Machinery industry average of 7.9% it's much better.

Check out our latest analysis for IHI

In the above chart we have measured IHI'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 IHI .

What Can We Tell From IHI's ROCE Trend?

We like the trends that we're seeing from IHI. The data shows that returns on capital have increased substantially over the last five years to 16%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 30%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

On a separate but related note, it's important to know that IHI has a current liabilities to total assets ratio of 51%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

Our Take On IHI's ROCE

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what IHI has. And a remarkable 258% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if IHI can keep these trends up, it could have a bright future ahead.

One final note, you should learn about the 3 warning signs we've spotted with IHI (including 2 which are potentially serious) .

While IHI 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.