Renesas Electronics (TSE:6723) Is Looking To Continue Growing Its Returns On Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So when we looked at Renesas Electronics (TSE:6723) and its trend of ROCE, we really liked what we saw.

What Is Return On Capital Employed (ROCE)?

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 Renesas Electronics:

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

0.11 = JP¥331b ÷ (JP¥3.7t - JP¥587b) (Based on the trailing twelve months to June 2024).

So, Renesas Electronics has an ROCE of 11%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Semiconductor industry average of 13%.

View our latest analysis for Renesas Electronics

Above you can see how the current ROCE for Renesas Electronics compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Renesas Electronics for free.

What Does the ROCE Trend For Renesas Electronics Tell Us?

Renesas Electronics is displaying some positive trends. Over the last five years, returns on capital employed have risen substantially to 11%. The amount of capital employed has increased too, by 121%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

Our Take On Renesas Electronics' ROCE

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Renesas Electronics has. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. In light of that, we think it's worth looking further into this stock because if Renesas Electronics can keep these trends up, it could have a bright future ahead.

Renesas Electronics does have some risks though, and we've spotted 1 warning sign for Renesas Electronics that you might be interested in.

While Renesas Electronics 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.