Phil CompanyInc (TSE:3267) Will Be Hoping To Turn Its Returns On Capital Around

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Having said that, from a first glance at Phil CompanyInc (TSE:3267) 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)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Phil CompanyInc is:

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

0.13 = JP¥525m ÷ (JP¥7.1b - JP¥2.9b) (Based on the trailing twelve months to August 2024).

Therefore, Phil CompanyInc has an ROCE of 13%. On its own, that's a standard return, however it's much better than the 9.8% generated by the Commercial Services industry.

See our latest analysis for Phil CompanyInc

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Phil CompanyInc.

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at Phil CompanyInc, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 13% from 29% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

Another thing to note, Phil CompanyInc has a high ratio of current liabilities to total assets of 41%. 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.

Our Take On Phil CompanyInc's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Phil CompanyInc. Despite these promising trends, the stock has collapsed 76% over the last five years, so there could be other factors hurting the company's prospects. Regardless, reinvestment can pay off in the long run, so we think astute investors may want to look further into this stock.

On a final note, we found 3 warning signs for Phil CompanyInc (2 are potentially serious) you should be aware of.

While Phil CompanyInc 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.