There Are Reasons To Feel Uneasy About Living Technologies' (TSE:4445) Returns On Capital

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at Living Technologies (TSE:4445), they do have a high ROCE, but we weren't exactly elated from how returns are trending.

What Is 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. The formula for this calculation on Living Technologies is:

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%. That's a fantastic return and not only that, it outpaces the average of 14% earned by companies in a similar industry.

Check out 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.

What The Trend Of ROCE Can Tell Us

In terms of Living Technologies' historical ROCE movements, the trend isn't fantastic. While it's comforting that the ROCE is high, five years ago it was 34%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

The Bottom Line

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. And the stock has done incredibly well with a 174% return over the last five years, so long term investors are no doubt ecstatic with that result. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

Living Technologies does have some risks though, and we've spotted 2 warning signs for Living Technologies that you might be interested in.

High returns are a key ingredient to strong performance, so check out our free list ofstocks 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.