Capital Allocation Trends At SuRaLa NetLtd (TSE:3998) Aren't Ideal

What financial metrics can indicate to us that a company is maturing or even in decline? 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. In light of that, from a first glance at SuRaLa NetLtd (TSE:3998), we've spotted some signs that it could be struggling, so let's investigate.

Understanding 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. To calculate this metric for SuRaLa NetLtd, this is the formula:

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

0.12 = JP¥262m ÷ (JP¥2.6b - JP¥357m) (Based on the trailing twelve months to September 2024).

Thus, SuRaLa NetLtd has an ROCE of 12%. On its own, that's a standard return, however it's much better than the 8.8% generated by the Consumer Services industry.

View our latest analysis for SuRaLa NetLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for SuRaLa NetLtd's ROCE against it's prior returns. If you'd like to look at how SuRaLa NetLtd has performed in the past in other metrics, you can view this free graph of SuRaLa NetLtd's past earnings, revenue and cash flow.

How Are Returns Trending?

We are a bit worried about the trend of returns on capital at SuRaLa NetLtd. Unfortunately the returns on capital have diminished from the 16% that they were earning one year ago. 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 one year. If these trends continue, we wouldn't expect SuRaLa NetLtd to turn into a multi-bagger.

The Bottom Line

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. Long term shareholders who've owned the stock over the last five years have experienced a 60% depreciation in their investment, so it appears the market might not like these trends either. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

SuRaLa NetLtd does have some risks, we noticed 4 warning signs (and 1 which is a bit concerning) we think you should know about.

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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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.