Returns On Capital At Poppins (TSE:7358) Paint A Concerning Picture

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. Having said that, from a first glance at Poppins (TSE:7358) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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 Poppins is:

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

0.13 = JP¥1.4b ÷ (JP¥17b - JP¥6.3b) (Based on the trailing twelve months to March 2024).

Thus, Poppins has an ROCE of 13%. On its own, that's a standard return, however it's much better than the 9.6% generated by the Consumer Services industry.

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'd like to look at how Poppins has performed in the past in other metrics, you can view this free graph of Poppins' past earnings, revenue and cash flow.

What Does the ROCE Trend For Poppins Tell Us?

When we looked at the ROCE trend at Poppins, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 13% from 23% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

What We Can Learn From Poppins' ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Poppins is reinvesting for growth and has higher sales as a result. However, despite the promising trends, the stock has fallen 65% over the last three years, so there might be an opportunity here for astute investors. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Poppins (of which 1 doesn't sit too well with us!) that you should know about.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com