Pola Orbis Holdings (TSE:4927) Is Finding It Tricky To Allocate Its Capital

When researching a stock for investment, what can tell us that the company is in decline? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. In light of that, from a first glance at Pola Orbis Holdings (TSE:4927), we've spotted some signs that it could be struggling, so let's investigate.

Return On Capital Employed (ROCE): What Is It?

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. The formula for this calculation on Pola Orbis Holdings is:

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

0.088 = JP¥15b ÷ (JP¥194b - JP¥25b) (Based on the trailing twelve months to September 2024).

Therefore, Pola Orbis Holdings has an ROCE of 8.8%. Even though it's in line with the industry average of 8.7%, it's still a low return by itself.

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're interested, you can view the analysts predictions in our free analyst report for Pola Orbis Holdings .

What The Trend Of ROCE Can Tell Us

There is reason to be cautious about Pola Orbis Holdings, given the returns are trending downwards. To be more specific, the ROCE was 17% 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 Pola Orbis Holdings to turn into a multi-bagger.

What We Can Learn From Pola Orbis Holdings' ROCE

In summary, it's unfortunate that Pola Orbis Holdings is generating lower returns from the same amount of capital. Long term shareholders who've owned the stock over the last five years have experienced a 32% depreciation in their investment, so it appears the market might not like these trends either. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

Like most companies, Pola Orbis Holdings does come with some risks, and we've found 1 warning sign that you should be aware of.

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.