Environmental Control CenterLtd (TSE:4657) Will Be Hoping To Turn Its Returns On Capital Around

If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. So after we looked into Environmental Control CenterLtd (TSE:4657), the trends above didn't look too great.

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. The formula for this calculation on Environmental Control CenterLtd is:

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

0.03 = JP¥119m ÷ (JP¥6.1b - JP¥2.2b) (Based on the trailing twelve months to March 2024).

Thus, Environmental Control CenterLtd has an ROCE of 3.0%. In absolute terms, that's a low return and it also under-performs the Commercial Services industry average of 9.2%.

View our latest analysis for Environmental Control CenterLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Environmental Control CenterLtd'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 Environmental Control CenterLtd.

What Can We Tell From Environmental Control CenterLtd's ROCE Trend?

There is reason to be cautious about Environmental Control CenterLtd, given the returns are trending downwards. About four years ago, returns on capital were 6.1%, however they're now substantially lower than that as we saw above. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. 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 four years. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Environmental Control CenterLtd becoming one if things continue as they have.

The Bottom Line On Environmental Control CenterLtd's ROCE

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. Investors haven't taken kindly to these developments, since the stock has declined 42% from where it was five years ago. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

Environmental Control CenterLtd does have some risks, we noticed 4 warning signs (and 1 which shouldn't be ignored) we think you should know about.

While Environmental Control CenterLtd 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.

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