Poppins (TSE:7358) May Have Issues Allocating Its Capital

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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we looked at Poppins (TSE:7358), it didn't seem to tick all of these boxes.

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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. The formula for this calculation on Poppins is:

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

0.14 = JP¥1.6b ÷ (JP¥17b - JP¥5.5b) (Based on the trailing twelve months to December 2024).

So, Poppins has an ROCE of 14%. In absolute terms, that's a satisfactory return, but compared to the Consumer Services industry average of 9.1% it's much better.

See our latest analysis for Poppins

Historical performance is a great place to start when researching a stock so above you can see the gauge for Poppins' ROCE against it's prior returns. If you're interested in investigating Poppins' past further, check out this free graph covering Poppins' past earnings, revenue and cash flow.

The Trend Of ROCE

In terms of Poppins' historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 24% over the last five years. However it looks like Poppins might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a related note, Poppins has decreased its current liabilities to 33% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Bottom Line

In summary, Poppins is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And in the last three years, the stock has given away 39% so the market doesn't look too hopeful on these trends strengthening any time soon. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

On a final note, we found 3 warning signs for Poppins (1 can't be ignored) you should be aware of.

While Poppins 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. 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.