Returns At Chugoku Electric Power (TSE:9504) Are On The Way Up

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So on that note, Chugoku Electric Power (TSE:9504) looks quite promising in regards to its trends of return on capital.

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 Chugoku Electric Power is:

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

0.061 = JP¥214b ÷ (JP¥4.1t - JP¥636b) (Based on the trailing twelve months to December 2023).

Therefore, Chugoku Electric Power has an ROCE of 6.1%. Even though it's in line with the industry average of 6.1%, it's still a low return by itself.

Check out our latest analysis for Chugoku Electric Power

Above you can see how the current ROCE for Chugoku Electric Power 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 Chugoku Electric Power .

How Are Returns Trending?

We're glad to see that ROCE is heading in the right direction, even if it is still low at the moment. Over the last five years, returns on capital employed have risen substantially to 6.1%. The amount of capital employed has increased too, by 29%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

The Bottom Line On Chugoku Electric Power's ROCE

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Chugoku Electric Power has. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 1.6% to shareholders. So with that in mind, we think the stock deserves further research.

Chugoku Electric Power does have some risks, we noticed 3 warning signs (and 2 which are significant) we think you should know about.

While Chugoku Electric Power 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.