Some Investors May Be Worried About Nexyz. Group's (TSE:4346) Returns On Capital

Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount 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. So after glancing at the trends within Nexyz. Group (TSE:4346), we weren't too hopeful.

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. To calculate this metric for Nexyz. Group, this is the formula:

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

0.12 = JP¥689m ÷ (JP¥15b - JP¥9.6b) (Based on the trailing twelve months to June 2024).

Therefore, Nexyz. Group has an ROCE of 12%. In absolute terms, that's a pretty standard return but compared to the Professional Services industry average it falls behind.

Check out our latest analysis for Nexyz. Group

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 Nexyz. Group.

The Trend Of ROCE

The trend of returns that Nexyz. Group is generating are raising some concerns. To be more specific, today's ROCE was 18% five years ago but has since fallen to 12%. What's equally concerning is that the amount of capital deployed in the business has shrunk by 38% over that same period. When you see both ROCE and capital employed diminishing, it can often be a sign of a mature and shrinking business that might be in structural decline. If these underlying trends continue, we wouldn't be too optimistic going forward.

On a side note, Nexyz. Group's current liabilities have increased over the last five years to 63% of total assets, effectively distorting the ROCE to some degree. Without this increase, it's likely that ROCE would be even lower than 12%. And with current liabilities at these levels, suppliers or short-term creditors are effectively funding a large part of the business, which can introduce some risks.

What We Can Learn From Nexyz. Group's ROCE

To see Nexyz. Group reducing the capital employed in the business in tandem with diminishing returns, is concerning. Investors haven't taken kindly to these developments, since the stock has declined 58% from where it was five years ago. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

Like most companies, Nexyz. Group does come with some risks, and we've found 4 warning signs that you should be aware of.

While Nexyz. Group 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.