Returns On Capital Signal Difficult Times Ahead For UCHIYAMA HOLDINGSLtd (TSE:6059)

What underlying fundamental trends can indicate that a company might be in decline? When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. In light of that, from a first glance at UCHIYAMA HOLDINGSLtd (TSE:6059), we've spotted some signs that it could be struggling, so let's investigate.

Understanding 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. To calculate this metric for UCHIYAMA HOLDINGSLtd, this is the formula:

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

0.027 = JP¥589m ÷ (JP¥31b - JP¥9.3b) (Based on the trailing twelve months to March 2024).

So, UCHIYAMA HOLDINGSLtd has an ROCE of 2.7%. Ultimately, that's a low return and it under-performs the Healthcare industry average of 8.6%.

See our latest analysis for UCHIYAMA HOLDINGSLtd

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

What Can We Tell From UCHIYAMA HOLDINGSLtd's ROCE Trend?

In terms of UCHIYAMA HOLDINGSLtd's historical ROCE movements, the trend doesn't inspire confidence. To be more specific, the ROCE was 4.4% five years ago, but since then it has dropped noticeably. 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 five years. If these trends continue, we wouldn't expect UCHIYAMA HOLDINGSLtd to turn into a multi-bagger.

Our Take On UCHIYAMA HOLDINGSLtd's ROCE

In summary, it's unfortunate that UCHIYAMA HOLDINGSLtd is generating lower returns from the same amount of capital. It should come as no surprise then that the stock has fallen 25% over the last five years, so it looks like investors are recognizing these changes. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

UCHIYAMA HOLDINGSLtd does come with some risks though, we found 4 warning signs in our investment analysis, and 1 of those is significant...

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.

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