Asti (TSE:6899) Will Want To Turn Around Its Return Trends

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after briefly looking over the numbers, we don't think Asti (TSE:6899) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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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 Asti is:

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

0.044 = JP¥1.5b ÷ (JP¥48b - JP¥14b) (Based on the trailing twelve months to December 2024).

So, Asti has an ROCE of 4.4%. Ultimately, that's a low return and it under-performs the Auto Components industry average of 6.5%.

View our latest analysis for Asti

Historical performance is a great place to start when researching a stock so above you can see the gauge for Asti's ROCE against it's prior returns. If you'd like to look at how Asti has performed in the past in other metrics, you can view this free graph of Asti's past earnings, revenue and cash flow.

What Can We Tell From Asti's ROCE Trend?

On the surface, the trend of ROCE at Asti doesn't inspire confidence. To be more specific, ROCE has fallen from 5.8% over the last five years. However it looks like Asti might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

The Key Takeaway

In summary, Asti is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Although the market must be expecting these trends to improve because the stock has gained 63% over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

Asti does have some risks though, and we've spotted 3 warning signs for Asti that you might be interested in.

While Asti may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.