Hamamatsu Photonics K.K's (TSE:6965) Returns Have Hit A Wall

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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, the ROCE of Hamamatsu Photonics K.K (TSE:6965) looks decent, right now, so lets see what the trend of returns can tell us.

Understanding 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. The formula for this calculation on Hamamatsu Photonics K.K is:

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

0.13 = JP¥45b ÷ (JP¥406b - JP¥58b) (Based on the trailing twelve months to March 2024).

So, Hamamatsu Photonics K.K has an ROCE of 13%. In absolute terms, that's a satisfactory return, but compared to the Electronic industry average of 8.9% it's much better.

View our latest analysis for Hamamatsu Photonics K.K

Above you can see how the current ROCE for Hamamatsu Photonics K.K compares to its prior returns on capital, but there's only so much you can tell from the past. 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?

The trend of ROCE doesn't stand out much, but returns on a whole are decent. The company has consistently earned 13% for the last five years, and the capital employed within the business has risen 64% in that time. Since 13% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.

The Bottom Line

In the end, Hamamatsu Photonics K.K has proven its ability to adequately reinvest capital at good rates of return. However, over the last five years, the stock has only delivered a 15% return to shareholders who held over that period. So because of the trends we're seeing, we'd recommend looking further into this stock to see if it has the makings of a multi-bagger.

If you're still interested in Hamamatsu Photonics K.K it's worth checking out our FREE intrinsic value approximation for 6965 to see if it's trading at an attractive price in other respects.

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.

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