Slowing Rates Of Return At Canon Electronics (TSE:7739) Leave Little Room For Excitement

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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we looked at Canon Electronics (TSE:7739), it didn't seem to tick all of these boxes.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its 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)

0.084 = JP¥10b ÷ (JP¥142b - JP¥18b) (Based on the trailing twelve months to December 2024).

So, Canon Electronics has an ROCE of 8.4%. In absolute terms, that's a low return but it's around the Electronic industry average of 9.0%.

See 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 .

So How Is Canon Electronics' ROCE Trending?

In terms of Canon Electronics' historical ROCE trend, it doesn't exactly demand attention. The company has employed 26% more capital in the last five years, and the returns on that capital have remained stable at 8.4%. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

The Bottom Line On Canon Electronics' ROCE

In summary, Canon Electronics has simply been reinvesting capital and generating the same low rate of return as before. Since the stock has gained an impressive 75% over the last five years, investors must think there's better things to come. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

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.