Returns On Capital At Keihan Holdings (TSE:9045) Have Stalled

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after investigating Keihan Holdings (TSE:9045), we don't think it's current trends fit the mold of a multi-bagger.

Understanding Return On Capital Employed (ROCE)

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 Keihan Holdings, this is the formula:

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

0.062 = JP¥39b ÷ (JP¥823b - JP¥186b) (Based on the trailing twelve months to September 2024).

So, Keihan Holdings has an ROCE of 6.2%. In absolute terms, that's a low return but it's around the Industrials industry average of 6.7%.

See our latest analysis for Keihan Holdings

In the above chart we have measured Keihan Holdings' prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Keihan Holdings for free.

How Are Returns Trending?

Over the past five years, Keihan Holdings' ROCE and capital employed have both remained mostly flat. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. So unless we see a substantial change at Keihan Holdings in terms of ROCE and additional investments being made, we wouldn't hold our breath on it being a multi-bagger.

In Conclusion...

In summary, Keihan Holdings isn't compounding its earnings but is generating stable returns on the same amount of capital employed. And in the last five years, the stock has given away 34% 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 Keihan Holdings has the makings of a multi-bagger.

One more thing to note, we've identified 2 warning signs with Keihan Holdings and understanding them should be part of your investment process.

While Keihan Holdings 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.