New Constructor's Network (TSE:7057) May Have Issues Allocating Its Capital

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. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. In light of that, when we looked at New Constructor's Network (TSE:7057) and its ROCE trend, we weren't exactly thrilled.

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 New Constructor's Network is:

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

0.046 = JP¥148m ÷ (JP¥6.5b - JP¥3.3b) (Based on the trailing twelve months to September 2024).

Thus, New Constructor's Network has an ROCE of 4.6%. In absolute terms, that's a low return and it also under-performs the Construction industry average of 8.9%.

View our latest analysis for New Constructor's Network

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

So How Is New Constructor's Network's ROCE Trending?

In terms of New Constructor's Network's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 4.6% from 9.5% five years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

On a separate but related note, it's important to know that New Constructor's Network has a current liabilities to total assets ratio of 51%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

Our Take On New Constructor's Network's ROCE

In summary, we're somewhat concerned by New Constructor's Network's diminishing returns on increasing amounts 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.

If you want to know some of the risks facing New Constructor's Network we've found 6 warning signs (1 is potentially serious!) that you should be aware of before investing here.

While New Constructor's Network 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.