Capital Allocation Trends At Living Technologies (TSE:4445) Aren't Ideal

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Looking at Living Technologies (TSE:4445), it does have a high ROCE right now, but lets see how returns are trending.

Understanding 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 Living Technologies, this is the formula:

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

0.25 = JP¥386m ÷ (JP¥2.2b - JP¥642m) (Based on the trailing twelve months to March 2024).

Thus, Living Technologies has an ROCE of 25%. In absolute terms that's a great return and it's even better than the Interactive Media and Services industry average of 13%.

See our latest analysis for Living Technologies

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

How Are Returns Trending?

When we looked at the ROCE trend at Living Technologies, we didn't gain much confidence. While it's comforting that the ROCE is high, five years ago it was 34%. 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. If these investments prove successful, this can bode very well for long term stock performance.

The Bottom Line On Living Technologies' ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Living Technologies is reinvesting for growth and has higher sales as a result. These growth trends haven't led to growth returns though, since the stock has fallen 60% over the last five years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

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

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets 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.