We Like These Underlying Return On Capital Trends At Odawara Auto-Machine Mfg (TSE:7314)

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So on that note, Odawara Auto-Machine Mfg (TSE:7314) looks quite promising in regards to its trends of return on capital.

Return On Capital Employed (ROCE): What Is It?

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. To calculate this metric for Odawara Auto-Machine Mfg, this is the formula:

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

0.095 = JP¥403m ÷ (JP¥8.4b - JP¥4.1b) (Based on the trailing twelve months to March 2024).

Thus, Odawara Auto-Machine Mfg has an ROCE of 9.5%. On its own that's a low return on capital but it's in line with the industry's average returns of 9.2%.

Check out our latest analysis for Odawara Auto-Machine Mfg

Historical performance is a great place to start when researching a stock so above you can see the gauge for Odawara Auto-Machine Mfg's ROCE against it's prior returns. If you're interested in investigating Odawara Auto-Machine Mfg's past further, check out this free graph covering Odawara Auto-Machine Mfg's past earnings, revenue and cash flow.

How Are Returns Trending?

It's great to see that Odawara Auto-Machine Mfg has started to generate some pre-tax earnings from prior investments. While the business is profitable now, it used to be incurring losses on invested capital five years ago. In regards to capital employed, Odawara Auto-Machine Mfg is using 31% less capital than it was five years ago, which on the surface, can indicate that the business has become more efficient at generating these returns. Odawara Auto-Machine Mfg could be selling under-performing assets since the ROCE is improving.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Effectively this means that suppliers or short-term creditors are now funding 49% of the business, which is more than it was five years ago. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.

Our Take On Odawara Auto-Machine Mfg's ROCE

In the end, Odawara Auto-Machine Mfg has proven it's capital allocation skills are good with those higher returns from less amount of capital. Since the stock has returned a solid 73% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

On a separate note, we've found 2 warning signs for Odawara Auto-Machine Mfg you'll probably want to know about.

While Odawara Auto-Machine Mfg 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.

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