Returns On Capital Signal Tricky Times Ahead For HEROZ (TSE:4382)

If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. In light of that, when we looked at HEROZ (TSE:4382) and its ROCE trend, we weren't exactly thrilled.

What Is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for HEROZ, this is the formula:

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

0.065 = JP¥446m ÷ (JP¥8.0b - JP¥1.1b) (Based on the trailing twelve months to July 2024).

Therefore, HEROZ has an ROCE of 6.5%. Ultimately, that's a low return and it under-performs the Entertainment industry average of 11%.

Check out our latest analysis for HEROZ

In the above chart we have measured HEROZ's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for HEROZ .

How Are Returns Trending?

When we looked at the ROCE trend at HEROZ, we didn't gain much confidence. To be more specific, ROCE has fallen from 11% over the last five years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

What We Can Learn From HEROZ's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that HEROZ is reinvesting for growth and has higher sales as a result. But since the stock has dived 78% in the last five years, there could be other drivers that are influencing the business' outlook. Regardless, reinvestment can pay off in the long run, so we think astute investors may want to look further into this stock.

HEROZ does have some risks though, and we've spotted 1 warning sign for HEROZ that you might be interested in.

While HEROZ 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.