Odakyu Electric Railway (TSE:9007) Shareholders Will Want The ROCE Trajectory To Continue

There are a few key trends to look for if we want to identify the next multi-bagger. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So on that note, Odakyu Electric Railway (TSE:9007) looks quite promising in regards to its trends of return on capital.

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What Is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Odakyu Electric Railway is:

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

0.049 = JP¥50b ÷ (JP¥1.4t - JP¥338b) (Based on the trailing twelve months to September 2025).

Thus, Odakyu Electric Railway has an ROCE of 4.9%. On its own that's a low return on capital but it's in line with the industry's average returns of 5.2%.

View our latest analysis for Odakyu Electric Railway

In the above chart we have measured Odakyu Electric Railway's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Odakyu Electric Railway for free.

What The Trend Of ROCE Can Tell Us

Shareholders will be relieved that Odakyu Electric Railway has broken into profitability. The company was generating losses five years ago, but has managed to turn it around and as we saw earlier is now earning 4.9%, which is always encouraging. On top of that, what's interesting is that the amount of capital being employed has remained steady, so the business hasn't needed to put any additional money to work to generate these higher returns. With no noticeable increase in capital employed, it's worth knowing what the company plans on doing going forward in regards to reinvesting and growing the business. So if you're looking for high growth, you'll want to see a business's capital employed also increasing.

The Bottom Line

To sum it up, Odakyu Electric Railway is collecting higher returns from the same amount of capital, and that's impressive. And since the stock has fallen 39% over the last five years, there might be an opportunity here. So researching this company further and determining whether or not these trends will continue seems justified.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Odakyu Electric Railway (of which 1 is significant!) that you should know about.

While Odakyu Electric Railway 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.