If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? 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. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. On that note, looking into CLIP (TYO:4705), we weren't too upbeat about how things were going.
What is Return On Capital Employed (ROCE)?
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for CLIP:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.046 = JP¥243m ÷ (JP¥5.9b - JP¥550m) (Based on the trailing twelve months to December 2020).
Therefore, CLIP has an ROCE of 4.6%. In absolute terms, that's a low return and it also under-performs the Consumer Services industry average of 8.0%.
Check out our latest analysis for CLIP
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 want to delve into the historical earnings, revenue and cash flow of CLIP, check out these free graphs here.
How Are Returns Trending?
In terms of CLIP's historical ROCE movements, the trend doesn't inspire confidence. To be more specific, the ROCE was 6.4% five years ago, but since then it has dropped noticeably. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. If these trends continue, we wouldn't expect CLIP to turn into a multi-bagger.
The Bottom Line On CLIP's ROCE
In summary, it's unfortunate that CLIP is generating lower returns from the same amount of capital. Despite the concerning underlying trends, the stock has actually gained 17% over the last five years, so it might be that the investors are expecting the trends to reverse. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.
CLIP does have some risks, we noticed 5 warning signs (and 1 which is concerning) we think you should know about.
While CLIP may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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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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About TSE:4705
Flawless balance sheet moderate.
