Here's What To Make Of Tanabe Consulting GroupLtd's (TSE:9644) Decelerating Rates Of Return

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. Having said that, from a first glance at Tanabe Consulting GroupLtd (TSE:9644) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding 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. The formula for this calculation on Tanabe Consulting GroupLtd is:

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

0.086 = JP¥1.0b ÷ (JP¥14b - JP¥2.2b) (Based on the trailing twelve months to March 2024).

Thus, Tanabe Consulting GroupLtd has an ROCE of 8.6%. 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 Tanabe Consulting GroupLtd

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Tanabe Consulting GroupLtd has performed in the past in other metrics, you can view this free graph of Tanabe Consulting GroupLtd's past earnings, revenue and cash flow.

The Trend Of ROCE

There hasn't been much to report for Tanabe Consulting GroupLtd's returns and its level of capital employed because both metrics have been steady for the past four years. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. With that in mind, unless investment picks up again in the future, we wouldn't expect Tanabe Consulting GroupLtd to be a multi-bagger going forward.

What We Can Learn From Tanabe Consulting GroupLtd's ROCE

In summary, Tanabe Consulting GroupLtd isn't compounding its earnings but is generating stable returns on the same amount of capital employed. Yet to long term shareholders the stock has gifted them an incredible 147% return in the last five years, so the market appears to be rosy about its future. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

If you'd like to know about the risks facing Tanabe Consulting GroupLtd, we've discovered 1 warning sign that you should be aware of.

While Tanabe Consulting GroupLtd isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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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