The Returns At Rinnai (TSE:5947) Aren't Growing

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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. That's why when we briefly looked at Rinnai's (TSE:5947) ROCE trend, we were pretty happy with what we saw.

What Is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Rinnai:

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

0.10 = JP¥50b ÷ (JP¥587b - JP¥99b) (Based on the trailing twelve months to September 2024).

So, Rinnai has an ROCE of 10%. In absolute terms, that's a satisfactory return, but compared to the Consumer Durables industry average of 6.5% 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'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Rinnai .

So How Is Rinnai's ROCE Trending?

While the current returns on capital are decent, they haven't changed much. Over the past five years, ROCE has remained relatively flat at around 10% and the business has deployed 41% more capital into its operations. 10% is a pretty standard return, and it provides some comfort knowing that Rinnai has consistently earned this amount. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.

The Bottom Line

The main thing to remember is that Rinnai has proven its ability to continually reinvest at respectable rates of return. However, over the last five years, the stock has only delivered a 40% return to shareholders who held over that period. So to determine if Rinnai is a multi-bagger going forward, we'd suggest digging deeper into the company's other fundamentals.

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.