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. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at Asti (TSE:6899) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
Return On Capital Employed (ROCE): What Is It?
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested 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)
0.052 = JP¥1.8b ÷ (JP¥47b - JP¥13b) (Based on the trailing twelve months to June 2024).
Thus, Asti has an ROCE of 5.2%. In absolute terms, that's a low return but it's around the Auto Components industry average of 6.2%.
See 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're interested in investigating Asti's past further, check out this free graph covering Asti's past earnings, revenue and cash flow.
The Trend Of ROCE
In terms of Asti's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 8.6%, but since then they've fallen to 5.2%. 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.
In Conclusion...
Bringing it all together, while we're somewhat encouraged by Asti's reinvestment in its own business, we're aware that returns are shrinking. Since the stock has gained an impressive 59% over the last five years, investors must think there's better things to come. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.
If you want to continue researching Asti, you might be interested to know about the 4 warning signs that our analysis has discovered.
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.
About TSE:6899
Asti
Engages in the manufacture and sale of electrical equipment for cars in Japan.
Established dividend payer moderate.
