IHI's (TSE:7013) Returns On Capital Are Heading Higher
Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So on that note, IHI (TSE:7013) looks quite promising in regards to its trends of return on capital.
Understanding Return On Capital Employed (ROCE)
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on IHI is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.12 = JP¥139b ÷ (JP¥2.3t - JP¥1.2t) (Based on the trailing twelve months to September 2025).
So, IHI has an ROCE of 12%. On its own, that's a standard return, however it's much better than the 7.9% generated by the Machinery industry.
View our latest analysis for IHI
Above you can see how the current ROCE for IHI 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 IHI .
How Are Returns Trending?
We like the trends that we're seeing from IHI. Over the last five years, returns on capital employed have risen substantially to 12%. The amount of capital employed has increased too, by 28%. So we're very much inspired by what we're seeing at IHI thanks to its ability to profitably reinvest capital.
On a separate but related note, it's important to know that IHI has a current liabilities to total assets ratio of 50%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.
The Key Takeaway
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 IHI has. Since the stock has returned a staggering 1,182% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it's worth looking further into this stock because if IHI can keep these trends up, it could have a bright future ahead.
If you want to know some of the risks facing IHI we've found 2 warning signs (1 is a bit concerning!) that you should be aware of before investing here.
While IHI 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.