There Are Reasons To Feel Uneasy About Advantage Risk Management's (TSE:8769) Returns On Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. 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.

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Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the 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)

0.19 = JP¥1.1b ÷ (JP¥9.0b - JP¥3.2b) (Based on the trailing twelve months to June 2025).

So, Advantage Risk Management has an ROCE of 19%. In absolute terms, that's a satisfactory return, but compared to the Healthcare industry average of 8.6% it's much better.

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.

So How Is Advantage Risk Management's ROCE Trending?

On the surface, the trend of ROCE at Advantage Risk Management doesn't inspire confidence. To be more specific, ROCE has fallen from 26% over the last five years. 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. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

The Bottom Line

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Advantage Risk Management. In light of this, the stock has only gained 11% over the last five years. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.

Like most companies, Advantage Risk Management does come with some risks, and we've found 2 warning signs that 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.