Wood OneLtd (TSE:7898) Could Be Struggling To Allocate Capital

To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. 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. Having said that, after a brief look, Wood OneLtd (TSE:7898) we aren't filled with optimism, but let's investigate further.

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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 Wood OneLtd, this is the formula:

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

0.0037 = JP¥273m ÷ (JP¥103b - JP¥28b) (Based on the trailing twelve months to December 2024).

Thus, Wood OneLtd has an ROCE of 0.4%. In absolute terms, that's a low return and it also under-performs the Forestry industry average of 4.0%.

View our latest analysis for Wood OneLtd

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Wood OneLtd has performed in the past in other metrics, you can view this free graph of Wood OneLtd's past earnings, revenue and cash flow .

So How Is Wood OneLtd's ROCE Trending?

We are a bit worried about the trend of returns on capital at Wood OneLtd. Unfortunately the returns on capital have diminished from the 1.6% 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. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Wood OneLtd becoming one if things continue as they have.

In Conclusion...

In summary, it's unfortunate that Wood OneLtd is generating lower returns from the same amount of capital. And long term shareholders have watched their investments stay flat over the last five years. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

Wood OneLtd does come with some risks though, we found 5 warning signs in our investment analysis, and 3 of those are a bit unpleasant...

While Wood OneLtd 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.