Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. Basically the company is earning less on its investments and it is also reducing its total assets. Having said that, after a brief look, FujishojiLtd (TYO:6257) we aren't filled with optimism, but let's investigate further.
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 FujishojiLtd is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.009 = JP¥383m ÷ (JP¥51b - JP¥8.2b) (Based on the trailing twelve months to March 2021).
So, FujishojiLtd has an ROCE of 0.9%. Ultimately, that's a low return and it under-performs the Leisure industry average of 6.1%.
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 FujishojiLtd's past further, check out this free graph of past earnings, revenue and cash flow.
The Trend Of ROCE
In terms of FujishojiLtd's historical ROCE movements, the trend doesn't inspire confidence. About two years ago, returns on capital were 2.9%, however they're now substantially lower than that as we saw above. 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 two years. If these trends continue, we wouldn't expect FujishojiLtd to turn into a multi-bagger.
In summary, it's unfortunate that FujishojiLtd is generating lower returns from the same amount of capital. Investors must expect better things on the horizon though because the stock has risen 17% in the last five years. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.
FujishojiLtd does have some risks though, and we've spotted 1 warning sign for FujishojiLtd that you might be interested in.
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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