Our Take On The Returns On Capital At Odawara Auto-Machine Mfg (TYO:7314)

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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. However, after briefly looking over the numbers, we don't think Odawara Auto-Machine Mfg (TYO:7314) 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?

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 Odawara Auto-Machine Mfg, this is the formula:

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

0.044 = JP¥189m ÷ (JP¥5.8b - JP¥1.5b) (Based on the trailing twelve months to December 2020).

So, Odawara Auto-Machine Mfg has an ROCE of 4.4%. In absolute terms, that's a low return and it also under-performs the Electronic industry average of 7.3%.

See our latest analysis for Odawara Auto-Machine Mfg

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Odawara Auto-Machine Mfg has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is Odawara Auto-Machine Mfg's ROCE Trending?

Over the past five years, Odawara Auto-Machine Mfg's ROCE and capital employed have both remained mostly flat. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. So unless we see a substantial change at Odawara Auto-Machine Mfg in terms of ROCE and additional investments being made, we wouldn't hold our breath on it being a multi-bagger.

The Bottom Line

In summary, Odawara Auto-Machine Mfg isn't compounding its earnings but is generating stable returns on the same amount of capital employed. Unsurprisingly, the stock has only gained 23% over the last five years, which potentially indicates that investors are accounting for this going forward. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

One more thing, we've spotted 2 warning signs facing Odawara Auto-Machine Mfg that you might find interesting.

While Odawara Auto-Machine Mfg 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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