Capital Allocation Trends At Asukanet (TSE:2438) Aren't Ideal

When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. Having said that, after a brief look, Asukanet (TSE:2438) we aren't filled with optimism, but let's investigate further.

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Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Asukanet:

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

0.071 = JP¥429m ÷ (JP¥6.7b - JP¥713m) (Based on the trailing twelve months to January 2025).

Thus, Asukanet has an ROCE of 7.1%. Ultimately, that's a low return and it under-performs the Commercial Services industry average of 9.8%.

Check out our latest analysis for Asukanet

Historical performance is a great place to start when researching a stock so above you can see the gauge for Asukanet's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Asukanet.

So How Is Asukanet's ROCE Trending?

In terms of Asukanet's historical ROCE movements, the trend doesn't inspire confidence. About five years ago, returns on capital were 14%, however they're now substantially lower than that as we saw above. Meanwhile, capital employed in the business has stayed roughly the flat over the period. 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 Asukanet becoming one if things continue as they have.

Our Take On Asukanet's ROCE

In summary, it's unfortunate that Asukanet is generating lower returns from the same amount of capital. It should come as no surprise then that the stock has fallen 52% over the last five years, so it looks like investors are recognizing these changes. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

On a final note, we found 4 warning signs for Asukanet (1 makes us a bit uncomfortable) you should be aware of.

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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.