Should We Be Excited About The Trends Of Returns At PRAP Japan (TYO:2449)?

There are a few key trends to look for if we want to identify the next multi-bagger. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding 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. Having said that, from a first glance at PRAP Japan (TYO:2449) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What is 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 PRAP Japan, this is the formula:

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

0.041 = JP¥181m ÷ (JP¥5.7b - JP¥1.3b) (Based on the trailing twelve months to November 2020).

Therefore, PRAP Japan has an ROCE of 4.1%. In absolute terms, that's a low return and it also under-performs the Media industry average of 8.9%.

See our latest analysis for PRAP Japan

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 PRAP Japan has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Can We Tell From PRAP Japan's ROCE Trend?

On the surface, the trend of ROCE at PRAP Japan doesn't inspire confidence. To be more specific, ROCE has fallen from 21% over the last five years. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

The Bottom Line

Bringing it all together, while we're somewhat encouraged by PRAP Japan's reinvestment in its own business, we're aware that returns are shrinking. Unsurprisingly, the stock has only gained 30% over the last five years, which potentially indicates that investors are accounting for this going forward. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

One more thing: We've identified 4 warning signs with PRAP Japan (at least 1 which is potentially serious) , and understanding these would certainly be useful.

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