Here's What's Concerning About Hankyu Hanshin Holdings' (TSE:9042) Returns On Capital

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at Hankyu Hanshin Holdings (TSE:9042) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

We've discovered 2 warning signs about Hankyu Hanshin Holdings. View them for free.

What Is 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 Hankyu Hanshin Holdings:

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

0.04 = JP¥108b ÷ (JP¥3.2t - JP¥481b) (Based on the trailing twelve months to December 2024).

So, Hankyu Hanshin Holdings has an ROCE of 4.0%. In absolute terms, that's a low return and it also under-performs the Transportation industry average of 5.1%.

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'd like, you can check out the forecasts from the analysts covering Hankyu Hanshin Holdings for free.

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

On the surface, the trend of ROCE at Hankyu Hanshin Holdings doesn't inspire confidence. To be more specific, ROCE has fallen from 5.4% over the last five years. 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.

What We Can Learn From Hankyu Hanshin Holdings' ROCE

Bringing it all together, while we're somewhat encouraged by Hankyu Hanshin Holdings' reinvestment in its own business, we're aware that returns are shrinking. And investors may be recognizing these trends since the stock has only returned a total of 19% to shareholders over the last five years. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

Hankyu Hanshin Holdings does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those can't be ignored...

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.