Here's What's Concerning About Osaka Steel's (TSE:5449) Returns On Capital

What underlying fundamental trends can indicate that a company might be in decline? Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. On that note, looking into Osaka Steel (TSE:5449), we weren't too upbeat about how things were going.

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Understanding 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 Osaka Steel, this is the formula:

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

0.033 = JP¥5.3b ÷ (JP¥200b - JP¥40b) (Based on the trailing twelve months to December 2024).

Thus, Osaka Steel has an ROCE of 3.3%. In absolute terms, that's a low return and it also under-performs the Metals and Mining industry average of 6.5%.

View our latest analysis for Osaka Steel

Historical performance is a great place to start when researching a stock so above you can see the gauge for Osaka Steel's ROCE against it's prior returns. If you'd like to look at how Osaka Steel has performed in the past in other metrics, you can view this free graph of Osaka Steel's past earnings, revenue and cash flow.

The Trend Of ROCE

In terms of Osaka Steel's historical ROCE movements, the trend doesn't inspire confidence. About five years ago, returns on capital were 5.1%, however they're now substantially lower than that as we saw above. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. If these trends continue, we wouldn't expect Osaka Steel to turn into a multi-bagger.

Our Take On Osaka Steel's ROCE

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. The market must be rosy on the stock's future because even though the underlying trends aren't too encouraging, the stock has soared 139%. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

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

While Osaka Steel may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.