Investors Could Be Concerned With Harmonic Drive Systems' (TSE:6324) Returns On Capital

If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? 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. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. Having said that, after a brief look, Harmonic Drive Systems (TSE:6324) we aren't filled with optimism, but let's investigate further.

Understanding 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. Analysts use this formula to calculate it for Harmonic Drive Systems:

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

0.0012 = JP¥125m ÷ (JP¥119b - JP¥12b) (Based on the trailing twelve months to March 2024).

Thus, Harmonic Drive Systems has an ROCE of 0.1%. Ultimately, that's a low return and it under-performs the Machinery industry average of 8.0%.

See our latest analysis for Harmonic Drive Systems

Above you can see how the current ROCE for Harmonic Drive Systems compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Harmonic Drive Systems .

What The Trend Of ROCE Can Tell Us

In terms of Harmonic Drive Systems' historical ROCE movements, the trend doesn't inspire confidence. To be more specific, the ROCE was 13% five years ago, but since then it has dropped noticeably. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Harmonic Drive Systems becoming one if things continue as they have.

What We Can Learn From Harmonic Drive Systems' ROCE

In summary, it's unfortunate that Harmonic Drive Systems is generating lower returns from the same amount of capital. Despite the concerning underlying trends, the stock has actually gained 8.8% over the last five years, so it might be that the investors are expecting the trends to reverse. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

Harmonic Drive Systems does have some risks though, and we've spotted 1 warning sign for Harmonic Drive Systems that you might be interested in.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.

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