Yamato Mobility & Mfg.Ltd (TSE:7886) Is Experiencing Growth In Returns On Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Speaking of which, we noticed some great changes in Yamato Mobility & Mfg.Ltd's (TSE:7886) returns on capital, so let's have a look.

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 Yamato Mobility & Mfg.Ltd:

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

0.058 = JP¥253m ÷ (JP¥8.3b - JP¥4.0b) (Based on the trailing twelve months to June 2024).

Thus, Yamato Mobility & Mfg.Ltd has an ROCE of 5.8%. In absolute terms, that's a low return but it's around the Chemicals industry average of 6.8%.

See our latest analysis for Yamato Mobility & Mfg.Ltd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Yamato Mobility & Mfg.Ltd's ROCE against it's prior returns. If you'd like to look at how Yamato Mobility & Mfg.Ltd has performed in the past in other metrics, you can view this free graph of Yamato Mobility & Mfg.Ltd's past earnings, revenue and cash flow.

What Does the ROCE Trend For Yamato Mobility & Mfg.Ltd Tell Us?

We're delighted to see that Yamato Mobility & Mfg.Ltd is reaping rewards from its investments and has now broken into profitability. The company now earns 5.8% on its capital, because five years ago it was incurring losses. While returns have increased, the amount of capital employed by Yamato Mobility & Mfg.Ltd has remained flat over the period. That being said, while an increase in efficiency is no doubt appealing, it'd be helpful to know if the company does have any investment plans going forward. So if you're looking for high growth, you'll want to see a business's capital employed also increasing.

On a side note, Yamato Mobility & Mfg.Ltd's current liabilities are still rather high at 48% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

In Conclusion...

As discussed above, Yamato Mobility & Mfg.Ltd appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. Since the stock has returned a solid 47% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

If you'd like to know more about Yamato Mobility & Mfg.Ltd, we've spotted 4 warning signs, and 2 of them are a bit unpleasant.

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.

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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.