Stock Analysis

Capital Allocation Trends At ASIRO (TSE:7378) Aren't Ideal

TSE:7378
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Did you know there are some financial metrics that can provide clues of a potential multi-bagger? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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 investigating ASIRO (TSE:7378), we don't think it's current trends fit the mold of a multi-bagger.

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 ASIRO is:

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

0.055 = JP¥147m ÷ (JP¥3.7b - JP¥1.0b) (Based on the trailing twelve months to July 2024).

Therefore, ASIRO has an ROCE of 5.5%. In absolute terms, that's a low return and it also under-performs the Professional Services industry average of 16%.

See our latest analysis for ASIRO

roce
TSE:7378 Return on Capital Employed December 3rd 2024

Above you can see how the current ROCE for ASIRO compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for ASIRO .

What Can We Tell From ASIRO's ROCE Trend?

In terms of ASIRO's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 16% over the last three years. 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.

On a side note, ASIRO's current liabilities have increased over the last three years to 27% of total assets, effectively distorting the ROCE to some degree. Without this increase, it's likely that ROCE would be even lower than 5.5%. While the ratio isn't currently too high, it's worth keeping an eye on this because if it gets particularly high, the business could then face some new elements of risk.

What We Can Learn From ASIRO's ROCE

While returns have fallen for ASIRO in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And long term investors must be optimistic going forward because the stock has returned a huge 112% to shareholders in the last three years. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for ASIRO (of which 1 is concerning!) that you should know about.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.