Pola Orbis Holdings (TSE:4927) Could Be Struggling To Allocate Capital

If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. And from a first read, things don't look too good at Pola Orbis Holdings (TSE:4927), so let's see why.

What Is Return On Capital Employed (ROCE)?

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. Analysts use this formula to calculate it for Pola Orbis Holdings:

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

0.092 = JP¥16b ÷ (JP¥201b - JP¥26b) (Based on the trailing twelve months to December 2023).

So, Pola Orbis Holdings has an ROCE of 9.2%. On its own that's a low return on capital but it's in line with the industry's average returns of 9.2%.

See our latest analysis for Pola Orbis Holdings

Above you can see how the current ROCE for Pola Orbis Holdings compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Pola Orbis Holdings .

What Does the ROCE Trend For Pola Orbis Holdings Tell Us?

There is reason to be cautious about Pola Orbis Holdings, given the returns are trending downwards. Unfortunately the returns on capital have diminished from the 20% that they were earning five years ago. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. 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 Pola Orbis Holdings to turn into a multi-bagger.

In Conclusion...

In summary, it's unfortunate that Pola Orbis Holdings is generating lower returns from the same amount of capital. It should come as no surprise then that the stock has fallen 51% over the last five years, so it looks like investors are recognizing these changes. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

One more thing to note, we've identified 1 warning sign with Pola Orbis Holdings and understanding it should be part of your investment process.

While Pola Orbis Holdings 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.