Rinnai (TSE:5947) Hasn't Managed To Accelerate Its Returns

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. In light of that, when we looked at Rinnai (TSE:5947) and its ROCE trend, we weren't exactly thrilled.

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What Is 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. The formula for this calculation on Rinnai is:

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

0.092 = JP¥46b ÷ (JP¥607b - JP¥109b) (Based on the trailing twelve months to March 2025).

Therefore, Rinnai has an ROCE of 9.2%. On its own that's a low return, but compared to the average of 6.5% generated by the Consumer Durables industry, it's much better.

View our latest analysis for Rinnai

In the above chart we have measured Rinnai'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 Rinnai .

The Trend Of ROCE

In terms of Rinnai's historical ROCE trend, it doesn't exactly demand attention. The company has employed 37% more capital in the last five years, and the returns on that capital have remained stable at 9.2%. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

The Bottom Line

Long story short, while Rinnai has been reinvesting its capital, the returns that it's generating haven't increased. And investors may be recognizing these trends since the stock has only returned a total of 29% to shareholders over the last five years. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

Rinnai could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation for 5947 on our platform quite valuable.

While Rinnai 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.