Investors Could Be Concerned With Brother Enterprises HoldingLtd's (SZSE:002562) Returns On Capital

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. However, after briefly looking over the numbers, we don't think Brother Enterprises HoldingLtd (SZSE:002562) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What Is 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. Analysts use this formula to calculate it for Brother Enterprises HoldingLtd:

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

0.013 = CN¥47m ÷ (CN¥5.8b - CN¥2.1b) (Based on the trailing twelve months to September 2023).

Thus, Brother Enterprises HoldingLtd has an ROCE of 1.3%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 5.7%.

Check out our latest analysis for Brother Enterprises HoldingLtd

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Brother Enterprises HoldingLtd's past further, check out this free graph covering Brother Enterprises HoldingLtd's past earnings, revenue and cash flow.

So How Is Brother Enterprises HoldingLtd's ROCE Trending?

The trend of ROCE doesn't look fantastic because it's fallen from 9.5% five years ago, while the business's capital employed increased by 30%. However, some of the increase in capital employed could be attributed to the recent capital raising that's been completed prior to their latest reporting period, so keep that in mind when looking at the ROCE decrease. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with Brother Enterprises HoldingLtd's earnings and if they change as a result from the capital raise.

On a side note, Brother Enterprises HoldingLtd's current liabilities have increased over the last five years to 36% of total assets, effectively distorting the ROCE to some degree. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. While the ratio isn't currently too high, it's worth keeping an eye on this because if it gets particularly high, the business could then face some new elements of risk.

The Bottom Line

In summary, we're somewhat concerned by Brother Enterprises HoldingLtd's diminishing returns on increasing amounts of capital. Long term shareholders who've owned the stock over the last five years have experienced a 32% depreciation in their investment, so it appears the market might not like these trends either. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

On a final note, we found 2 warning signs for Brother Enterprises HoldingLtd (1 is a bit unpleasant) you should be aware of.

While Brother Enterprises HoldingLtd 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.