There Are Reasons To Feel Uneasy About Asahi Intecc's (TSE:7747) Returns On Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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 Asahi Intecc (TSE:7747) and its ROCE trend, we weren't exactly thrilled.

What Is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Asahi Intecc is:

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

0.14 = JP¥21b ÷ (JP¥179b - JP¥23b) (Based on the trailing twelve months to March 2024).

Thus, Asahi Intecc has an ROCE of 14%. On its own, that's a standard return, however it's much better than the 11% generated by the Medical Equipment industry.

Check out our latest analysis for Asahi Intecc

In the above chart we have measured Asahi Intecc's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Asahi Intecc for free.

How Are Returns Trending?

On the surface, the trend of ROCE at Asahi Intecc doesn't inspire confidence. To be more specific, ROCE has fallen from 20% over the last five years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

The Bottom Line On Asahi Intecc's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Asahi Intecc is reinvesting for growth and has higher sales as a result. These growth trends haven't led to growth returns though, since the stock has fallen 17% over the last five years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

If you're still interested in Asahi Intecc it's worth checking out our FREE intrinsic value approximation for 7747 to see if it's trading at an attractive price in other respects.

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.

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