The slowdown in the Sony group’s (TSE: 6758) yield rates leaves little room for enthusiasm

To find a multi-bagger stock, what are the underlying trends we should look for in a company? First, we’ll want to see a proven solution back on capital employed (ROCE) which is increasing, and on the other hand, increasing growth base capital employed. Basically, this means that a company has profitable initiatives that it can continue to reinvest in, which is a characteristic of a capital machine. That said, at first glance Sony Group (TSE: 6758) We don’t jump out of our chairs at the evolution of yields, but take a closer look.

Understanding Return on Capital Employed (ROCE)

If you’ve never worked with ROCE before, it measures the “return” (pre-tax profit) that a company generates from the capital employed in its business. To calculate this metric for the Sony group, here is the formula:

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

0.05 = 1.2t JP¥ ÷ (34t JP¥ – 10t JP¥) (Based on the last twelve months to March 2024).

So, The Sony Group has an ROCE of 5.0%. In absolute terms, this is a low return and is also below the consumer durable sector average of 6.6%.

Check out our latest analysis for Sony Group

In the chart above, we measured Sony Group’s past ROCE against its past performance, but the future is arguably more important. If you want to see what analysts are predicting for the future, you should check out our free analyst report for Sony Group.

So, what is the evolution of the ROCE of the Sony group?

Returns on capital have not changed much for the Sony Group in recent years. The company has consistently earned 5.0% over the past five years and capital employed within the company has increased by 60% during this period. Given that the company has increased the amount of capital employed, it appears that the investments made are simply not providing a high return on capital.

The final ROCE result of the Sony group

In conclusion, Sony Group has invested more capital into the company, but the returns on that capital have not increased. Yet for long-term shareholders, the stock has returned an incredible 138% over the past five years, so the market seems optimistic about its future. But if the trajectory of these underlying trends continues, we think the likelihood of it being a multi-bagger from here is not high.

If you’re still interested in the Sony Group, it’s worth checking out our FREE approximation of intrinsic value for 6758 to see if it is trading at an attractive price in other respects.

Although the Sony group does not generate the highest return, take a look at this free list of companies that earn high returns on equity with strong balance sheets.

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

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