Returns On Capital At Odakyu Electric Railway (TSE:9007) Have Stalled

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. In light of that, when we looked at Odakyu Electric Railway (TSE:9007) and its ROCE trend, we weren't exactly thrilled.

Understanding 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 Odakyu Electric Railway:

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

0.058 = JP¥53b ÷ (JP¥1.2t - JP¥328b) (Based on the trailing twelve months to June 2024).

Thus, Odakyu Electric Railway has an ROCE of 5.8%. On its own, that's a low figure but it's around the 5.1% average generated by the Transportation industry.

See our latest analysis for Odakyu Electric Railway

In the above chart we have measured Odakyu Electric Railway's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Odakyu Electric Railway for free.

How Are Returns Trending?

Over the past five years, Odakyu Electric Railway's ROCE and capital employed have both remained mostly flat. This tells us the company isn't reinvesting in itself, so it's plausible that it's past the growth phase. So unless we see a substantial change at Odakyu Electric Railway in terms of ROCE and additional investments being made, we wouldn't hold our breath on it being a multi-bagger.

The Key Takeaway

In summary, Odakyu Electric Railway isn't compounding its earnings but is generating stable returns on the same amount of capital employed. And in the last five years, the stock has given away 34% so the market doesn't look too hopeful on these trends strengthening any time soon. Therefore based on the analysis done in this article, we don't think Odakyu Electric Railway has the makings of a multi-bagger.

One final note, you should learn about the 3 warning signs we've spotted with Odakyu Electric Railway (including 2 which are concerning) .

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.