JAPAN MATERIAL (TSE:6055) Will Be Hoping To Turn Its Returns On Capital Around

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at JAPAN MATERIAL (TSE:6055), 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. To calculate this metric for JAPAN MATERIAL, this is the formula:

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

0.17 = JP¥8.4b ÷ (JP¥57b - JP¥7.4b) (Based on the trailing twelve months to June 2024).

Thus, JAPAN MATERIAL has an ROCE of 17%. In absolute terms, that's a satisfactory return, but compared to the Semiconductor industry average of 13% it's much better.

Check out our latest analysis for JAPAN MATERIAL

In the above chart we have measured JAPAN MATERIAL's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for JAPAN MATERIAL .

What Does the ROCE Trend For JAPAN MATERIAL Tell Us?

In terms of JAPAN MATERIAL's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 17% from 30% 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 may take some time before the company starts to see any change in earnings from these investments.

On a side note, JAPAN MATERIAL has done well to pay down its current liabilities to 13% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

Our Take On JAPAN MATERIAL's ROCE

Bringing it all together, while we're somewhat encouraged by JAPAN MATERIAL's reinvestment in its own business, we're aware that returns are shrinking. And with the stock having returned a mere 25% 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.

On a separate note, we've found 1 warning sign for JAPAN MATERIAL you'll probably want to know about.

While JAPAN MATERIAL may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.