Hikari Tsushin (TSE:9435) Might Be Having Difficulty Using Its Capital Effectively

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. Having said that, from a first glance at Hikari Tsushin (TSE:9435) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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. The formula for this calculation on Hikari Tsushin is:

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

0.06 = JP¥104b ÷ (JP¥2.1t - JP¥381b) (Based on the trailing twelve months to September 2024).

Thus, Hikari Tsushin has an ROCE of 6.0%. On its own, that's a low figure but it's around the 6.6% average generated by the Industrials industry.

View our latest analysis for Hikari Tsushin

Above you can see how the current ROCE for Hikari Tsushin compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Hikari Tsushin for free.

What Does the ROCE Trend For Hikari Tsushin Tell Us?

In terms of Hikari Tsushin's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 11% over the last five years. However it looks like Hikari Tsushin 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 may take some time before the company starts to see any change in earnings from these investments.

The Bottom Line On Hikari Tsushin's ROCE

To conclude, we've found that Hikari Tsushin is reinvesting in the business, but returns have been falling. Since the stock has gained an impressive 42% over the last five years, investors must think there's better things to come. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

On a separate note, we've found 1 warning sign for Hikari Tsushin you'll probably want to know about.

While Hikari Tsushin 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.