The Return Trends At Tohoku Electric Power Company (TSE:9506) Look Promising

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding 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, Tohoku Electric Power Company (TSE:9506) looks quite promising in regards to its trends of return on capital.

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

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 Tohoku Electric Power Company:

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

0.076 = JP¥322b ÷ (JP¥5.4t - JP¥1.2t) (Based on the trailing twelve months to March 2024).

So, Tohoku Electric Power Company has an ROCE of 7.6%. On its own that's a low return, but compared to the average of 6.0% generated by the Electric Utilities industry, it's much better.

Check out our latest analysis for Tohoku Electric Power Company

Above you can see how the current ROCE for Tohoku Electric Power Company 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 Tohoku Electric Power Company for free.

The Trend Of ROCE

Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 7.6%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 30%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

In Conclusion...

To sum it up, Tohoku Electric Power Company has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Since the stock has returned a solid 52% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 4 warning signs for Tohoku Electric Power Company (of which 2 are a bit unpleasant!) that you should know about.

While Tohoku Electric Power Company 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com