Return trends for Bridgestone (TSE:5108) are not enticing

What underlying trends should we look for in a company to find a multi-bagger stock? Firstly, we want to see something proven return on capital employed (ROCE) increases, and secondly, it grows base of the capital employed. Essentially, this means that a company has profitable initiatives that it can continue to reinvest in, which is a characteristic of a compounding machine. So when we let our eyes wander over it Bridgestones (TSE:5108) ROCE trend, we liked what we saw.

What is Return on Capital Employed (ROCE)?

Just to clarify in case you’re not sure, ROCE is a measure used to evaluate how much pre-tax income (as a percentage) a company generates from the capital invested in its business. To calculate this metric for Bridgestone, the formula is:

Return on capital employed = Earnings before interest and taxes (EBIT) ÷ (total assets – current liabilities)

0.11 = ¥517 billion ÷ (¥5.9t – ¥1.2t) (Based on the last twelve months ended June 2024).

Therefore, Bridgestone has an ROCE of 11%. In absolute terms, this is a satisfactory return, but compared to the auto components industry average of 6.2%, it is much better.

Check out our latest analysis for Bridgestone

In the chart above we measured Bridgestone’s past ROCE compared to its past performance, but the future is arguably more important. If you are interested, you can see the analyst forecasts in our free Analyst report for Bridgestone.

What can we say about Bridgestone’s ROCE trend?

The ROCE trend is not particularly noticeable, but the returns are decent overall. The company has deployed 52% more capital over the last five years, and its return on capital is stable at 11%. 11% is a fairly standard return, and it’s reassuring to know that Bridgestone has consistently earned this amount. Stable returns can be unexciting at this scale, but if they can be sustained over the long term, they often offer nice rewards for shareholders.

Our opinion on Bridgestone’s ROCE

Ultimately, Bridgestone has demonstrated its ability to reinvest capital appropriately and with good returns. So it’s no surprise that shareholders have received a respectable return of 54% by holding over the last five years. While the stock may be “more expensive” than before, we believe the strong fundamentals warrant further research into this stock.

Something else to note: We discovered 1 warning sign Being familiar with and understanding Bridgestone should be part of your investment process.

For those who like to invest solid companies, Check this out free List of companies with solid balance sheets and high returns on equity.

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This article from Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts using only an unbiased methodology and our articles are not intended as financial advice. It does not constitute a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. Our goal is to provide you with long-term focused analysis based on fundamental data. Note that our analysis may not reflect the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.