Be Wary Of Chuokeizai-Sha Holdings (TYO:9476) And Its Returns On Capital

What financial metrics can indicate to us that a company is maturing or even in decline? When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. This indicates the company is producing less profit from its investments and its total assets are decreasing. Having said that, after a brief look, Chuokeizai-Sha Holdings (TYO:9476) we aren't filled with optimism, but let's investigate further.

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 Chuokeizai-Sha Holdings, this is the formula:

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

0.011 = JP¥48m ÷ (JP¥4.9b - JP¥660m) (Based on the trailing twelve months to December 2020).

So, Chuokeizai-Sha Holdings has an ROCE of 1.1%. Ultimately, that's a low return and it under-performs the Media industry average of 9.9%.

Check out our latest analysis for Chuokeizai-Sha Holdings

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

So How Is Chuokeizai-Sha Holdings' ROCE Trending?

We are a bit worried about the trend of returns on capital at Chuokeizai-Sha Holdings. About five years ago, returns on capital were 2.9%, 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 Chuokeizai-Sha Holdings to turn into a multi-bagger.

The Bottom Line On Chuokeizai-Sha Holdings' ROCE

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. Yet despite these concerning fundamentals, the stock has performed strongly with a 64% return over the last five years, so investors appear very optimistic. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

On a final note, we found 4 warning signs for Chuokeizai-Sha Holdings (1 can't be ignored) you should be aware of.

While Chuokeizai-Sha Holdings 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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