There Are Reasons To Feel Uneasy About Hakuhodo DY Holdings' (TSE:2433) Returns On Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Hakuhodo DY Holdings (TSE:2433) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. Analysts use this formula to calculate it for Hakuhodo DY Holdings:

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

0.075 = JP¥35b ÷ (JP¥1.0t - JP¥578b) (Based on the trailing twelve months to December 2023).

Therefore, Hakuhodo DY Holdings has an ROCE of 7.5%. In absolute terms, that's a low return and it also under-performs the Media industry average of 9.5%.

View our latest analysis for Hakuhodo DY Holdings

Above you can see how the current ROCE for Hakuhodo DY Holdings compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Hakuhodo DY Holdings .

So How Is Hakuhodo DY Holdings' ROCE Trending?

On the surface, the trend of ROCE at Hakuhodo DY Holdings doesn't inspire confidence. Around five years ago the returns on capital were 19%, but since then they've fallen to 7.5%. 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 may take some time before the company starts to see any change in earnings from these investments.

On a side note, Hakuhodo DY Holdings' current liabilities are still rather high at 55% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Bottom Line On Hakuhodo DY Holdings' ROCE

Bringing it all together, while we're somewhat encouraged by Hakuhodo DY Holdings' reinvestment in its own business, we're aware that returns are shrinking. Since the stock has declined 14% over the last five years, investors may not be too optimistic on this trend improving either. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

If you want to know some of the risks facing Hakuhodo DY Holdings we've found 3 warning signs (1 is potentially serious!) that you should be aware of before investing here.

While Hakuhodo DY 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.