The Returns On Capital At ARIAKE JAPAN (TSE:2815) Don't Inspire Confidence

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at ARIAKE JAPAN (TSE:2815) and its ROCE trend, we weren't exactly thrilled.

Return On Capital Employed (ROCE): What Is It?

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. To calculate this metric for ARIAKE JAPAN, this is the formula:

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

0.074 = JP¥9.6b ÷ (JP¥140b - JP¥11b) (Based on the trailing twelve months to September 2024).

So, ARIAKE JAPAN has an ROCE of 7.4%. Even though it's in line with the industry average of 7.2%, it's still a low return by itself.

Check out our latest analysis for ARIAKE JAPAN

Above you can see how the current ROCE for ARIAKE JAPAN compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering ARIAKE JAPAN for free.

How Are Returns Trending?

In terms of ARIAKE JAPAN's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 12%, but since then they've fallen to 7.4%. 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.

The Key Takeaway

While returns have fallen for ARIAKE JAPAN in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. These growth trends haven't led to growth returns though, since the stock has fallen 22% over the last five years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

If you're still interested in ARIAKE JAPAN it's worth checking out our FREE intrinsic value approximation for 2815 to see if it's trading at an attractive price in other respects.

While ARIAKE JAPAN 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.