Return Trends At Odakyu Electric Railway (TSE:9007) Aren't Appealing

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after briefly looking over the numbers, we don't think Odakyu Electric Railway (TSE:9007) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding 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 Odakyu Electric Railway is:

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

0.055 = JP¥53b ÷ (JP¥1.3t - JP¥322b) (Based on the trailing twelve months to September 2024).

Thus, Odakyu Electric Railway has an ROCE of 5.5%. On its own that's a low return on capital but it's in line with the industry's average returns of 4.9%.

View our latest analysis for Odakyu Electric Railway

Above you can see how the current ROCE for Odakyu Electric Railway 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 Odakyu Electric Railway for free.

The Trend Of ROCE

Things have been pretty stable at Odakyu Electric Railway, with its capital employed and returns on that capital staying somewhat the same for the last five years. This tells us the company isn't reinvesting in itself, so it's plausible that it's past the growth phase. With that in mind, unless investment picks up again in the future, we wouldn't expect Odakyu Electric Railway to be a multi-bagger going forward.

In Conclusion...

In a nutshell, Odakyu Electric Railway has been trudging along with the same returns from the same amount of capital over the last five years. Since the stock has declined 40% over the last five years, investors may not be too optimistic on this trend improving either. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

If you'd like to know more about Odakyu Electric Railway, we've spotted 4 warning signs, and 2 of them shouldn't be ignored.

While Odakyu Electric Railway 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.