Here's What To Make Of Japan Warranty Support's (TSE:7386) Decelerating Rates Of Return

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at Japan Warranty Support (TSE:7386) and its ROCE trend, we weren't exactly thrilled.

What Is 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. The formula for this calculation on Japan Warranty Support is:

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

0.073 = JP¥690m ÷ (JP¥11b - JP¥1.8b) (Based on the trailing twelve months to December 2023).

Thus, Japan Warranty Support has an ROCE of 7.3%. On its own, that's a low figure but it's around the 9.0% average generated by the Consumer Services industry.

Check out our latest analysis for Japan Warranty Support

Above you can see how the current ROCE for Japan Warranty Support compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Japan Warranty Support .

How Are Returns Trending?

The returns on capital haven't changed much for Japan Warranty Support in recent years. Over the past three years, ROCE has remained relatively flat at around 7.3% and the business has deployed 56% more capital into its operations. 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.

Our Take On Japan Warranty Support's ROCE

Long story short, while Japan Warranty Support has been reinvesting its capital, the returns that it's generating haven't increased. Although the market must be expecting these trends to improve because the stock has gained 16% over the last year. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

On a separate note, we've found 3 warning signs for Japan Warranty Support you'll probably want to 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.