Does Azuma House's (TYO:3293) Returns On Capital Reflect Well On The Business?

To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. So after we looked into Azuma House (TYO:3293), the trends above didn't look too great.

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 Azuma House, this is the formula:

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

0.039 = JP¥1.0b ÷ (JP¥31b - JP¥5.4b) (Based on the trailing twelve months to September 2020).

Thus, Azuma House has an ROCE of 3.9%. Ultimately, that's a low return and it under-performs the Consumer Durables industry average of 8.0%.

Check out our latest analysis for Azuma House

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're interested in investigating Azuma House's past further, check out this free graph of past earnings, revenue and cash flow.

So How Is Azuma House's ROCE Trending?

In terms of Azuma House's historical ROCE movements, the trend doesn't inspire confidence. About two years ago, returns on capital were 5.9%, however they're now substantially lower than that as we saw above. Meanwhile, capital employed in the business has stayed roughly the flat over the period. 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 two years. If these trends continue, we wouldn't expect Azuma House to turn into a multi-bagger.

In Conclusion...

In summary, it's unfortunate that Azuma House is generating lower returns from the same amount of capital. Investors must expect better things on the horizon though because the stock has risen 11% in the last five years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 4 warning signs for Azuma House (of which 2 can't be ignored!) that you should know about.

While Azuma House 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. 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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