Japan Aviation Electronics Industry (TSE:6807) Is Reinvesting At Lower Rates Of Return

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after investigating Japan Aviation Electronics Industry (TSE:6807), 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. Analysts use this formula to calculate it for Japan Aviation Electronics Industry:

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

0.088 = JP¥16b ÷ (JP¥239b - JP¥54b) (Based on the trailing twelve months to June 2024).

So, Japan Aviation Electronics Industry has an ROCE of 8.8%. Even though it's in line with the industry average of 9.4%, it's still a low return by itself.

View our latest analysis for Japan Aviation Electronics Industry

Above you can see how the current ROCE for Japan Aviation Electronics Industry compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Japan Aviation Electronics Industry .

What The Trend Of ROCE Can Tell Us

In terms of Japan Aviation Electronics Industry's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 11%, but since then they've fallen to 8.8%. 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 may take some time before the company starts to see any change in earnings from these investments.

The Bottom Line On Japan Aviation Electronics Industry's ROCE

To conclude, we've found that Japan Aviation Electronics Industry is reinvesting in the business, but returns have been falling. Although the market must be expecting these trends to improve because the stock has gained 74% over the last five years. 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 Japan Aviation Electronics Industry it's worth checking out our FREE intrinsic value approximation for 6807 to see if it's trading at an attractive price in other respects.

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.