Advantage Risk Management (TSE:8769) Will Want To Turn Around Its Return Trends

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. However, after briefly looking over the numbers, we don't think Advantage Risk Management (TSE:8769) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. To calculate this metric for Advantage Risk Management, this is the formula:

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

0.18 = JP¥739m ÷ (JP¥6.7b - JP¥2.6b) (Based on the trailing twelve months to June 2024).

Therefore, Advantage Risk Management has an ROCE of 18%. On its own, that's a standard return, however it's much better than the 8.8% generated by the Healthcare industry.

See our latest analysis for Advantage Risk Management

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

What Can We Tell From Advantage Risk Management's ROCE Trend?

When we looked at the ROCE trend at Advantage Risk Management, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 18% from 33% five years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

In Conclusion...

To conclude, we've found that Advantage Risk Management is reinvesting in the business, but returns have been falling. And investors appear hesitant that the trends will pick up because the stock has fallen 27% in the last five years. Therefore based on the analysis done in this article, we don't think Advantage Risk Management has the makings of a multi-bagger.

On a final note, we found 4 warning signs for Advantage Risk Management (1 is a bit unpleasant) you should be aware of.

While Advantage Risk Management isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.