Lihit Lab.Inc's (TSE:7975) Returns On Capital Not Reflecting Well On The Business

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. And from a first read, things don't look too good at Lihit Lab.Inc (TSE:7975), so let's see why.

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

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 Lihit Lab.Inc:

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

0.00092 = JP¥11m ÷ (JP¥13b - JP¥1.4b) (Based on the trailing twelve months to November 2024).

So, Lihit Lab.Inc has an ROCE of 0.09%. In absolute terms, that's a low return and it also under-performs the Commercial Services industry average of 9.8%.

Check out our latest analysis for Lihit Lab.Inc

Historical performance is a great place to start when researching a stock so above you can see the gauge for Lihit Lab.Inc's ROCE against it's prior returns. If you're interested in investigating Lihit Lab.Inc's past further, check out this free graph covering Lihit Lab.Inc's past earnings, revenue and cash flow.

So How Is Lihit Lab.Inc's ROCE Trending?

In terms of Lihit Lab.Inc's historical ROCE movements, the trend doesn't inspire confidence. To be more specific, the ROCE was 4.5% five years ago, but since then it has dropped noticeably. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. 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 five years. If these trends continue, we wouldn't expect Lihit Lab.Inc to turn into a multi-bagger.

What We Can Learn From Lihit Lab.Inc's ROCE

In summary, it's unfortunate that Lihit Lab.Inc is generating lower returns from the same amount of capital. Yet despite these concerning fundamentals, the stock has performed strongly with a 59% return over the last five years, so investors appear very optimistic. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

Lihit Lab.Inc does have some risks, we noticed 4 warning signs (and 1 which is a bit concerning) we think 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.