Renewable Japan (TSE:9522) Has Some Way To Go To Become A Multi-Bagger

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Having said that, from a first glance at Renewable Japan (TSE:9522) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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. To calculate this metric for Renewable Japan, this is the formula:

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

0.028 = JP¥3.6b ÷ (JP¥159b - JP¥29b) (Based on the trailing twelve months to December 2023).

So, Renewable Japan has an ROCE of 2.8%. Even though it's in line with the industry average of 3.4%, it's still a low return by itself.

Check out our latest analysis for Renewable Japan

Historical performance is a great place to start when researching a stock so above you can see the gauge for Renewable Japan's ROCE against it's prior returns. If you'd like to look at how Renewable Japan has performed in the past in other metrics, you can view this free graph of Renewable Japan's past earnings, revenue and cash flow.

How Are Returns Trending?

There are better returns on capital out there than what we're seeing at Renewable Japan. The company has consistently earned 2.8% for the last four years, and the capital employed within the business has risen 220% in that time. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

What We Can Learn From Renewable Japan's ROCE

Long story short, while Renewable Japan has been reinvesting its capital, the returns that it's generating haven't increased. Since the stock has gained an impressive 47% over the last year, investors must think there's better things to come. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

Renewable Japan does have some risks, we noticed 3 warning signs (and 1 which can't be ignored) we think you should know about.

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.