Investors Met With Slowing Returns on Capital At Inaba Denki SangyoLtd (TSE:9934)

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. So, when we ran our eye over Inaba Denki SangyoLtd's (TSE:9934) trend of ROCE, we liked what we saw.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Inaba Denki SangyoLtd:

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

0.13 = JP¥21b ÷ (JP¥263b - JP¥95b) (Based on the trailing twelve months to March 2024).

Thus, Inaba Denki SangyoLtd has an ROCE of 13%. In absolute terms, that's a satisfactory return, but compared to the Trade Distributors industry average of 7.4% it's much better.

Check out our latest analysis for Inaba Denki SangyoLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Inaba Denki SangyoLtd'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 Inaba Denki SangyoLtd.

The Trend Of ROCE

The trend of ROCE doesn't stand out much, but returns on a whole are decent. Over the past five years, ROCE has remained relatively flat at around 13% and the business has deployed 31% more capital into its operations. 13% is a pretty standard return, and it provides some comfort knowing that Inaba Denki SangyoLtd has consistently earned this amount. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.

The Key Takeaway

To sum it up, Inaba Denki SangyoLtd has simply been reinvesting capital steadily, at those decent rates of return. And the stock has done incredibly well with a 107% return over the last five years, so long term investors are no doubt ecstatic with that result. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.

If you'd like to know about the risks facing Inaba Denki SangyoLtd, we've discovered 1 warning sign that you should be aware of.

While Inaba Denki SangyoLtd 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.

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