Yokogawa Electric (TSE:6841) Is Experiencing Growth In Returns On Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. With that in mind, we've noticed some promising trends at Yokogawa Electric (TSE:6841) so let's look a bit deeper.

Understanding Return On Capital Employed (ROCE)

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. The formula for this calculation on Yokogawa Electric is:

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

0.16 = JP¥81b ÷ (JP¥662b - JP¥165b) (Based on the trailing twelve months to September 2024).

Thus, Yokogawa Electric has an ROCE of 16%. In absolute terms, that's a satisfactory return, but compared to the Electronic industry average of 9.1% it's much better.

Check out our latest analysis for Yokogawa Electric

Above you can see how the current ROCE for Yokogawa Electric compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Yokogawa Electric for free.

How Are Returns Trending?

We like the trends that we're seeing from Yokogawa Electric. Over the last five years, returns on capital employed have risen substantially to 16%. The amount of capital employed has increased too, by 58%. So we're very much inspired by what we're seeing at Yokogawa Electric thanks to its ability to profitably reinvest capital.

The Bottom Line On Yokogawa Electric's ROCE

To sum it up, Yokogawa Electric has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Since the stock has returned a solid 78% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.

On the other side of ROCE, we have to consider valuation. That's why we have a FREE intrinsic value estimation for 6841 on our platform that is definitely worth checking out.

While Yokogawa Electric 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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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.