Returns On Capital At AZEARTH (TSE:3161) Have Stalled

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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after investigating AZEARTH (TSE:3161), we don't think it's current trends fit the mold of a multi-bagger.

Understanding Return On Capital Employed (ROCE)

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 AZEARTH:

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

0.042 = JP¥292m ÷ (JP¥8.5b - JP¥1.5b) (Based on the trailing twelve months to April 2024).

Thus, AZEARTH has an ROCE of 4.2%. On its own that's a low return on capital but it's in line with the industry's average returns of 3.7%.

View our latest analysis for AZEARTH

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 AZEARTH has performed in the past in other metrics, you can view this free graph of AZEARTH's past earnings, revenue and cash flow.

The Trend Of ROCE

In terms of AZEARTH's historical ROCE trend, it doesn't exactly demand attention. The company has employed 21% more capital in the last five years, and the returns on that capital have remained stable at 4.2%. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

What We Can Learn From AZEARTH's ROCE

As we've seen above, AZEARTH's returns on capital haven't increased but it is reinvesting in the business. And with the stock having returned a mere 40% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

One more thing to note, we've identified 3 warning signs with AZEARTH and understanding these should be part of your investment process.

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.