Be Wary Of Hankyu Hanshin Holdings (TSE:9042) And Its Returns On Capital

There are a few key trends to look for if we want to identify the next multi-bagger. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. However, after investigating Hankyu Hanshin Holdings (TSE:9042), we don't think it's current trends fit the mold of a multi-bagger.

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

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Hankyu Hanshin Holdings is:

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

0.041 = JP¥106b ÷ (JP¥3.1t - JP¥490b) (Based on the trailing twelve months to June 2024).

So, Hankyu Hanshin Holdings has an ROCE of 4.1%. Ultimately, that's a low return and it under-performs the Transportation industry average of 5.3%.

Check out our latest analysis for Hankyu Hanshin Holdings

Above you can see how the current ROCE for Hankyu Hanshin Holdings compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Hankyu Hanshin Holdings .

What Does the ROCE Trend For Hankyu Hanshin Holdings Tell Us?

When we looked at the ROCE trend at Hankyu Hanshin Holdings, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 4.1% from 5.5% five years ago. However it looks like Hankyu Hanshin Holdings might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

The Key Takeaway

In summary, Hankyu Hanshin Holdings is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Unsurprisingly, the stock has only gained 8.5% over the last five years, which potentially indicates that investors are accounting for this going forward. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

Hankyu Hanshin Holdings does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is significant...

While Hankyu Hanshin 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.