Techno Smart (TSE:6246) Could Be Struggling To Allocate Capital

What financial metrics can indicate to us that a company is maturing or even in decline? A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. This indicates the company is producing less profit from its investments and its total assets are decreasing. And from a first read, things don't look too good at Techno Smart (TSE:6246), so let's see why.

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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 Techno Smart is:

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

0.12 = JP¥2.4b ÷ (JP¥28b - JP¥8.1b) (Based on the trailing twelve months to December 2024).

Thus, Techno Smart has an ROCE of 12%. In absolute terms, that's a satisfactory return, but compared to the Machinery industry average of 7.8% it's much better.

Check out our latest analysis for Techno Smart

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

How Are Returns Trending?

In terms of Techno Smart's historical ROCE movements, the trend doesn't inspire confidence. Unfortunately the returns on capital have diminished from the 20% that they were earning five years ago. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Techno Smart becoming one if things continue as they have.

Our Take On Techno Smart's ROCE

In summary, it's unfortunate that Techno Smart is generating lower returns from the same amount of capital. Yet despite these poor fundamentals, the stock has gained a huge 128% over the last five years, so investors appear very optimistic. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

Techno Smart could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation for 6246 on our platform quite valuable.

While Techno Smart 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.