The Returns At Hirose ElectricLtd (TSE:6806) Aren't Growing

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at Hirose ElectricLtd (TSE:6806) and its ROCE trend, we weren't exactly thrilled.

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. The formula for this calculation on Hirose ElectricLtd is:

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

0.094 = JP¥35b ÷ (JP¥395b - JP¥22b) (Based on the trailing twelve months to December 2023).

So, Hirose ElectricLtd has an ROCE of 9.4%. On its own, that's a low figure but it's around the 9.7% average generated by the Electronic industry.

View our latest analysis for Hirose ElectricLtd

In the above chart we have measured Hirose ElectricLtd's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Hirose ElectricLtd for free.

What Can We Tell From Hirose ElectricLtd's ROCE Trend?

There hasn't been much to report for Hirose ElectricLtd's returns and its level of capital employed because both metrics have been steady for the past five years. Businesses with these traits tend to be mature and steady operations because they're past the growth phase. So don't be surprised if Hirose ElectricLtd doesn't end up being a multi-bagger in a few years time.

The Bottom Line On Hirose ElectricLtd's ROCE

In summary, Hirose ElectricLtd isn't compounding its earnings but is generating stable returns on the same amount of capital employed. Since the stock has gained an impressive 45% over the last five years, investors must think there's better things to come. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

On a final note, we've found 1 warning sign for Hirose ElectricLtd that we think 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.