Investors Could Be Concerned With Yamaha's (TSE:7951) Returns On Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after briefly looking over the numbers, we don't think Yamaha (TSE:7951) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding 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 Yamaha:

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

0.058 = JP¥30b ÷ (JP¥623b - JP¥102b) (Based on the trailing twelve months to September 2024).

Therefore, Yamaha has an ROCE of 5.8%. In absolute terms, that's a low return and it also under-performs the Leisure industry average of 16%.

View our latest analysis for Yamaha

Above you can see how the current ROCE for Yamaha compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Yamaha .

So How Is Yamaha's ROCE Trending?

When we looked at the ROCE trend at Yamaha, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 5.8% from 14% five years ago. However it looks like Yamaha 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.

Our Take On Yamaha's ROCE

Bringing it all together, while we're somewhat encouraged by Yamaha's reinvestment in its own business, we're aware that returns are shrinking. And investors appear hesitant that the trends will pick up because the stock has fallen 41% in the last five years. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

Yamaha does have some risks though, and we've spotted 2 warning signs for Yamaha that you might be interested in.

While Yamaha isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.