There Are Reasons To Feel Uneasy About Asaka RikenLtd's (TSE:5724) Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after briefly looking over the numbers, we don't think Asaka RikenLtd (TSE:5724) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Asaka RikenLtd, this is the formula:

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

0.029 = JP¥185m ÷ (JP¥8.4b - JP¥2.2b) (Based on the trailing twelve months to March 2024).

Thus, Asaka RikenLtd has an ROCE of 2.9%. In absolute terms, that's a low return and it also under-performs the Commercial Services industry average of 9.1%.

View our latest analysis for Asaka RikenLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Asaka RikenLtd's ROCE against it's prior returns. If you'd like to look at how Asaka RikenLtd has performed in the past in other metrics, you can view this free graph of Asaka RikenLtd's past earnings, revenue and cash flow.

The Trend Of ROCE

In terms of Asaka RikenLtd's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 5.5% over the last five years. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

The Bottom Line

In summary, we're somewhat concerned by Asaka RikenLtd's diminishing returns on increasing amounts of capital. However the stock has delivered a 54% return to shareholders over the last five years, so investors might be expecting the trends to turn around. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

Asaka RikenLtd does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those is concerning...

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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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