Here's What's Concerning About Phil CompanyInc's (TSE:3267) Returns On Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Phil CompanyInc (TSE:3267) and its ROCE trend, we weren't exactly thrilled.

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

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Phil CompanyInc:

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

0.04 = JP¥155m ÷ (JP¥5.5b - JP¥1.6b) (Based on the trailing twelve months to November 2023).

Thus, Phil CompanyInc has an ROCE of 4.0%. In absolute terms, that's a low return and it also under-performs the Commercial Services industry average of 9.1%.

Check out our latest analysis for Phil CompanyInc

Historical performance is a great place to start when researching a stock so above you can see the gauge for Phil CompanyInc's ROCE against it's prior returns. If you're interested in investigating Phil CompanyInc's past further, check out this free graph covering Phil CompanyInc's past earnings, revenue and cash flow.

The Trend Of ROCE

In terms of Phil CompanyInc's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 27%, but since then they've fallen to 4.0%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

On a side note, Phil CompanyInc has done well to pay down its current liabilities to 30% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

In Conclusion...

While returns have fallen for Phil CompanyInc in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. But since the stock has dived 80% in the last five years, there could be other drivers that are influencing the business' outlook. Regardless, reinvestment can pay off in the long run, so we think astute investors may want to look further into this stock.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 6 warning signs for Phil CompanyInc (of which 3 are concerning!) that you should know about.

While Phil CompanyInc 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.