Returns On Capital Signal Tricky Times Ahead For Murata Manufacturing (TSE:6981)

There are a few key trends to look for if we want to identify the next multi-bagger. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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 Murata Manufacturing (TSE:6981) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What Is 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 Murata Manufacturing is:

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

0.096 = JP¥261b ÷ (JP¥3.0t - JP¥318b) (Based on the trailing twelve months to March 2024).

Therefore, Murata Manufacturing has an ROCE of 9.6%. 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 Murata Manufacturing

In the above chart we have measured Murata Manufacturing'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 Murata Manufacturing for free.

What Can We Tell From Murata Manufacturing's ROCE Trend?

On the surface, the trend of ROCE at Murata Manufacturing doesn't inspire confidence. Around five years ago the returns on capital were 15%, but since then they've fallen to 9.6%. 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.

Our Take On Murata Manufacturing's ROCE

To conclude, we've found that Murata Manufacturing is reinvesting in the business, but returns have been falling. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 150% gain to shareholders who have held 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.

Murata Manufacturing could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation for 6981 on our platform quite valuable.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com