Investors Could Be Concerned With Meiji Holdings' (TSE:2269) Returns On Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, 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. Although, when we looked at Meiji Holdings (TSE:2269), it didn't seem to tick all of these boxes.

What Is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Meiji Holdings:

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

0.096 = JP¥84b ÷ (JP¥1.2t - JP¥322b) (Based on the trailing twelve months to March 2024).

Thus, Meiji Holdings has an ROCE of 9.6%. On its own that's a low return, but compared to the average of 7.4% generated by the Food industry, it's much better.

View our latest analysis for Meiji Holdings

In the above chart we have measured Meiji Holdings' prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Meiji Holdings for free.

What Does the ROCE Trend For Meiji Holdings Tell Us?

On the surface, the trend of ROCE at Meiji Holdings doesn't inspire confidence. Over the last five years, returns on capital have decreased to 9.6% from 14% five years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

In Conclusion...

Bringing it all together, while we're somewhat encouraged by Meiji Holdings' reinvestment in its own business, we're aware that returns are shrinking. And with the stock having returned a mere 3.8% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

If you're still interested in Meiji Holdings it's worth checking out our FREE intrinsic value approximation for 2269 to see if it's trading at an attractive price in other respects.

While Meiji Holdings 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.

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