Investors Met With Slowing Returns on Capital At Amano (TSE:6436)

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. That's why when we briefly looked at Amano's (TSE:6436) ROCE trend, we were pretty happy with what we saw.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Amano, this is the formula:

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

0.15 = JP¥20b ÷ (JP¥183b - JP¥48b) (Based on the trailing twelve months to June 2024).

Therefore, Amano has an ROCE of 15%. On its own, that's a standard return, however it's much better than the 9.2% generated by the Electronic industry.

See our latest analysis for Amano

In the above chart we have measured Amano'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 Amano .

What Can We Tell From Amano's ROCE Trend?

The trend of ROCE doesn't stand out much, but returns on a whole are decent. The company has consistently earned 15% for the last five years, and the capital employed within the business has risen 23% in that time. Since 15% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.

In Conclusion...

The main thing to remember is that Amano has proven its ability to continually reinvest at respectable rates of return. In light of this, the stock has only gained 39% over the last five years for shareholders who have owned the stock in this period. So to determine if Amano is a multi-bagger going forward, we'd suggest digging deeper into the company's other fundamentals.

If you'd like to know about the risks facing Amano, we've discovered 1 warning sign that you should be aware of.

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.

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