Livero (TSE:9245) Will Be Hoping To Turn Its Returns On Capital Around

There are a few key trends to look for if we want to identify the next multi-bagger. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after investigating Livero (TSE:9245), we don't think it's current trends fit the mold of a multi-bagger.

What Is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Livero, this is the formula:

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

0.063 = JP¥178m ÷ (JP¥4.4b - JP¥1.6b) (Based on the trailing twelve months to December 2023).

Thus, Livero has an ROCE of 6.3%. Ultimately, that's a low return and it under-performs the Professional Services industry average of 15%.

See our latest analysis for Livero

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

What The Trend Of ROCE Can Tell Us

In terms of Livero's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 33% over the last four 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. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a related note, Livero has decreased its current liabilities to 35% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Key Takeaway

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Livero. These trends don't appear to have influenced returns though, because the total return from the stock has been mostly flat over the last year. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

On a final note, we found 4 warning signs for Livero (2 are concerning) you should be aware of.

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.