Here's What To Make Of CAREER BANK's (SPSE:4834) Returns On Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding 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 CAREER BANK (SPSE:4834) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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. The formula for this calculation on CAREER BANK is:

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

0.032 = JP¥45m ÷ (JP¥3.0b - JP¥1.6b) (Based on the trailing twelve months to November 2020).

So, CAREER BANK has an ROCE of 3.2%. In absolute terms, that's a low return and it also under-performs the Professional Services industry average of 17%.

Check out our latest analysis for CAREER BANK

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

How Are Returns Trending?

In terms of CAREER BANK's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 7.9%, but since then they've fallen to 3.2%. However it looks like CAREER BANK 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.

On a side note, CAREER BANK's current liabilities are still rather high at 53% of total assets. 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. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Key Takeaway

Bringing it all together, while we're somewhat encouraged by CAREER BANK's reinvestment in its own business, we're aware that returns are shrinking. And with the stock having returned a mere 1.1% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

On a final note, we found 3 warning signs for CAREER BANK (2 are significant) you should be aware of.

While CAREER BANK 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. 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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