Itochu EnexLtd (TSE:8133) Has More To Do To Multiply In Value Going Forward

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Itochu EnexLtd (TSE:8133), we don't think it's current trends fit the mold of a multi-bagger.

Return On Capital Employed (ROCE): What Is It?

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. To calculate this metric for Itochu EnexLtd, this is the formula:

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

0.07 = JP¥19b ÷ (JP¥444b - JP¥173b) (Based on the trailing twelve months to March 2024).

So, Itochu EnexLtd has an ROCE of 7.0%. In absolute terms, that's a low return but it's around the Oil and Gas industry average of 8.7%.

See our latest analysis for Itochu EnexLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Itochu EnexLtd's ROCE against it's prior returns. If you're interested in investigating Itochu EnexLtd's past further, check out this free graph covering Itochu EnexLtd's past earnings, revenue and cash flow.

What Can We Tell From Itochu EnexLtd's ROCE Trend?

In terms of Itochu EnexLtd's historical ROCE trend, it doesn't exactly demand attention. The company has employed 30% more capital in the last five years, and the returns on that capital have remained stable at 7.0%. 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 On Itochu EnexLtd's ROCE

Long story short, while Itochu EnexLtd has been reinvesting its capital, the returns that it's generating haven't increased. Yet to long term shareholders the stock has gifted them an incredible 124% return in the last five years, so the market appears to be rosy about its future. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

One more thing, we've spotted 1 warning sign facing Itochu EnexLtd that you might find interesting.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.