Atom Livin Tech (TSE:3426) Has Some Difficulty Using Its Capital Effectively

Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. Basically the company is earning less on its investments and it is also reducing its total assets. In light of that, from a first glance at Atom Livin Tech (TSE:3426), we've spotted some signs that it could be struggling, so let's investigate.

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Understanding Return On Capital Employed (ROCE)

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. Analysts use this formula to calculate it for Atom Livin Tech:

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

0.04 = JP¥419m ÷ (JP¥12b - JP¥1.9b) (Based on the trailing twelve months to December 2024).

Therefore, Atom Livin Tech has an ROCE of 4.0%. Ultimately, that's a low return and it under-performs the Building industry average of 7.5%.

See our latest analysis for Atom Livin Tech

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 want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Atom Livin Tech .

What The Trend Of ROCE Can Tell Us

There is reason to be cautious about Atom Livin Tech, given the returns are trending downwards. About five years ago, returns on capital were 7.6%, however they're now substantially lower than that as we saw above. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. If these trends continue, we wouldn't expect Atom Livin Tech to turn into a multi-bagger.

Our Take On Atom Livin Tech's ROCE

In summary, it's unfortunate that Atom Livin Tech is generating lower returns from the same amount of capital. Investors must expect better things on the horizon though because the stock has risen 38% in the last five years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

On a final note, we found 3 warning signs for Atom Livin Tech (2 don't sit too well with us) you should be aware of.

While Atom Livin Tech 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.