REFINVERSE Group (TSE:7375) Has Some Difficulty Using Its Capital Effectively

What financial metrics can indicate to us that a company is maturing or even in decline? When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. This reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. In light of that, from a first glance at REFINVERSE Group (TSE:7375), we've spotted some signs that it could be struggling, so let's investigate.

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. Analysts use this formula to calculate it for REFINVERSE Group:

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

0.033 = JP¥76m ÷ (JP¥3.4b - JP¥1.1b) (Based on the trailing twelve months to September 2024).

Therefore, REFINVERSE Group has an ROCE of 3.3%. In absolute terms, that's a low return and it also under-performs the Commercial Services industry average of 9.8%.

View our latest analysis for REFINVERSE Group

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

So How Is REFINVERSE Group's ROCE Trending?

The trend of ROCE at REFINVERSE Group is showing some signs of weakness. Unfortunately, returns have declined substantially over the last two years to the 3.3% we see today. In addition to that, REFINVERSE Group is now employing 27% less capital than it was two years ago. The fact that both are shrinking is an indication that the business is going through some tough times. If these underlying trends continue, we wouldn't be too optimistic going forward.

In Conclusion...

In summary, it's unfortunate that REFINVERSE Group is shrinking its capital base and also generating lower returns. Investors haven't taken kindly to these developments, since the stock has declined 36% from where it was five years ago. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

One more thing: We've identified 2 warning signs with REFINVERSE Group (at least 1 which is a bit unpleasant) , and understanding them would certainly be useful.

While REFINVERSE Group 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.