Hamamatsu Photonics K.K (TSE:6965) May Have Issues Allocating Its Capital

What are the early trends we should look for to identify a stock that could 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. 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 briefly looking over the numbers, we don't think Hamamatsu Photonics K.K (TSE:6965) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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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. To calculate this metric for Hamamatsu Photonics K.K, this is the formula:

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

0.074 = JP¥25b ÷ (JP¥449b - JP¥110b) (Based on the trailing twelve months to December 2024).

Therefore, Hamamatsu Photonics K.K has an ROCE of 7.4%. In absolute terms, that's a low return but it's around the Electronic industry average of 8.9%.

Check out our latest analysis for Hamamatsu Photonics K.K

In the above chart we have measured Hamamatsu Photonics K.K'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 Hamamatsu Photonics K.K .

What Does the ROCE Trend For Hamamatsu Photonics K.K Tell Us?

Unfortunately, the trend isn't great with ROCE falling from 11% five years ago, while capital employed has grown 52%. That being said, Hamamatsu Photonics K.K raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with Hamamatsu Photonics K.K's earnings and if they change as a result from the capital raise.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 24%, which has impacted the ROCE. Without this increase, it's likely that ROCE would be even lower than 7.4%. While the ratio isn't currently too high, it's worth keeping an eye on this because if it gets particularly high, the business could then face some new elements of risk.

The Key Takeaway

In summary, Hamamatsu Photonics K.K is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Since the stock has declined 44% over the last five years, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don't think Hamamatsu Photonics K.K has the makings of a multi-bagger.

Like most companies, Hamamatsu Photonics K.K does come with some risks, and we've found 3 warning signs that you should be aware of.

While Hamamatsu Photonics K.K 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.