Some Investors May Be Worried About Seiko Epson's (TSE:6724) Returns On Capital

There are a few key trends to look for if we want to identify the next multi-bagger. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. 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 investigating Seiko Epson (TSE:6724), we don't think it's current trends fit the mold of a multi-bagger.

What Is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Seiko Epson, this is the formula:

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

0.063 = JP¥66b ÷ (JP¥1.5t - JP¥425b) (Based on the trailing twelve months to June 2024).

So, Seiko Epson has an ROCE of 6.3%. In absolute terms, that's a low return and it also under-performs the Tech industry average of 9.2%.

View our latest analysis for Seiko Epson

In the above chart we have measured Seiko Epson's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Seiko Epson .

So How Is Seiko Epson's ROCE Trending?

On the surface, the trend of ROCE at Seiko Epson doesn't inspire confidence. Over the last five years, returns on capital have decreased to 6.3% from 7.8% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

The Bottom Line

To conclude, we've found that Seiko Epson is reinvesting in the business, but returns have been falling. Since the stock has gained an impressive 99% over the last five years, investors must think there's better things to come. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

If you're still interested in Seiko Epson it's worth checking out our FREE intrinsic value approximation for 6724 to see if it's trading at an attractive price in other respects.

While Seiko Epson 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.