Mitsubishi Heavy Industries' (TSE:7011) Returns On Capital Are Heading Higher
To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. Speaking of which, we noticed some great changes in Mitsubishi Heavy Industries' (TSE:7011) returns on capital, so let's have a look.
Understanding 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. Analysts use this formula to calculate it for Mitsubishi Heavy Industries:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.083 = JP¥311b ÷ (JP¥7.0t - JP¥3.3t) (Based on the trailing twelve months to September 2025).
So, Mitsubishi Heavy Industries has an ROCE of 8.3%. On its own that's a low return on capital but it's in line with the industry's average returns of 8.0%.
See our latest analysis for Mitsubishi Heavy Industries
In the above chart we have measured Mitsubishi Heavy Industries' prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Mitsubishi Heavy Industries .
What Can We Tell From Mitsubishi Heavy Industries' ROCE Trend?
We're glad to see that ROCE is heading in the right direction, even if it is still low at the moment. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 8.3%. The amount of capital employed has increased too, by 84%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.
In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 47%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance. However, current liabilities are still at a pretty high level, so just be aware that this can bring with it some risks.
The Bottom Line On Mitsubishi Heavy Industries' ROCE
All in all, it's terrific to see that Mitsubishi Heavy Industries is reaping the rewards from prior investments and is growing its capital base. And a remarkable 1,391% total return over the last five years tells us that investors are expecting more good things to come in the future. Therefore, we think it would be worth your time to check if these trends are going to continue.
On a final note, we've found 1 warning sign for Mitsubishi Heavy Industries that we think you should be aware of.
While Mitsubishi Heavy Industries 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.