Here's What's Concerning About Canon Electronics' (TSE:7739) Returns On Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Although, when we looked at Canon Electronics (TSE:7739), it didn't seem to tick all of these boxes.

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. Analysts use this formula to calculate it for Canon Electronics:

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

0.079 = JP¥9.1b ÷ (JP¥131b - JP¥16b) (Based on the trailing twelve months to December 2023).

Thus, Canon Electronics has an ROCE of 7.9%. In absolute terms, that's a low return but it's around the Electronic industry average of 9.7%.

View our latest analysis for Canon Electronics

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Canon Electronics' past further, check out this free graph covering Canon Electronics' past earnings, revenue and cash flow.

The Trend Of ROCE

In terms of Canon Electronics' historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 9.9%, but since then they've fallen to 7.9%. 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's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

The Bottom Line

To conclude, we've found that Canon Electronics is reinvesting in the business, but returns have been falling. Although the market must be expecting these trends to improve because the stock has gained 73% over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

Like most companies, Canon Electronics does come with some risks, and we've found 1 warning sign that you should be aware of.

While Canon Electronics 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.