Osaka Gas' (TSE:9532) Returns Have Hit A Wall

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. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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 Osaka Gas (TSE:9532), we don't think it's current trends fit the mold of a multi-bagger.

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 Osaka Gas, this is the formula:

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

0.047 = JP¥131b ÷ (JP¥3.3t - JP¥487b) (Based on the trailing twelve months to September 2024).

So, Osaka Gas has an ROCE of 4.7%. On its own that's a low return on capital but it's in line with the industry's average returns of 4.7%.

See our latest analysis for Osaka Gas

In the above chart we have measured Osaka Gas' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Osaka Gas .

What The Trend Of ROCE Can Tell Us

The returns on capital haven't changed much for Osaka Gas in recent years. Over the past five years, ROCE has remained relatively flat at around 4.7% and the business has deployed 59% more capital into its operations. 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.

Our Take On Osaka Gas' ROCE

In summary, Osaka Gas has simply been reinvesting capital and generating the same low rate of return as before. Since the stock has gained an impressive 62% over the last five years, 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.

On a final note, we've found 3 warning signs for Osaka Gas that we think you should be aware of.

While Osaka Gas 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.