Capital Allocation Trends At Sotetsu Holdings (TSE:9003) Aren't Ideal

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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 Sotetsu Holdings (TSE:9003), it didn't seem to tick all of these boxes.

What Is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Sotetsu Holdings is:

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

0.05 = JP¥29b ÷ (JP¥715b - JP¥140b) (Based on the trailing twelve months to March 2024).

Therefore, Sotetsu Holdings has an ROCE of 5.0%. Even though it's in line with the industry average of 4.8%, it's still a low return by itself.

View our latest analysis for Sotetsu Holdings

Above you can see how the current ROCE for Sotetsu Holdings compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Sotetsu Holdings for free.

So How Is Sotetsu Holdings' ROCE Trending?

When we looked at the ROCE trend at Sotetsu Holdings, we didn't gain much confidence. Around five years ago the returns on capital were 6.7%, but since then they've fallen to 5.0%. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. 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 On Sotetsu Holdings' ROCE

Bringing it all together, while we're somewhat encouraged by Sotetsu Holdings' reinvestment in its own business, we're aware that returns are shrinking. Since the stock has declined 17% over the last five years, investors may not be too optimistic on this trend improving either. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for Sotetsu Holdings (of which 1 shouldn't be ignored!) that you should know about.

While Sotetsu Holdings 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.

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