Alpha (TSE:4760) Shareholders Will Want The ROCE Trajectory To Continue

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So on that note, Alpha (TSE:4760) looks quite promising in regards to its trends of return on capital.

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Return On Capital Employed (ROCE): What Is It?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Alpha is:

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

0.052 = JP¥117m ÷ (JP¥4.5b - JP¥2.3b) (Based on the trailing twelve months to November 2024).

Thus, Alpha has an ROCE of 5.2%. In absolute terms, that's a low return and it also under-performs the Media industry average of 9.4%.

Check out our latest analysis for Alpha

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're interested in investigating Alpha's past further, check out this free graph covering Alpha's past earnings, revenue and cash flow .

What The Trend Of ROCE Can Tell Us

We're delighted to see that Alpha is reaping rewards from its investments and has now broken into profitability. Historically the company was generating losses but as we can see from the latest figures referenced above, they're now earning 5.2% on their capital employed. In regards to capital employed, Alpha is using 22% less capital than it was five years ago, which on the surface, can indicate that the business has become more efficient at generating these returns. Alpha could be selling under-performing assets since the ROCE is improving.

On a side note, Alpha's current liabilities are still rather high at 50% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Key Takeaway

From what we've seen above, Alpha has managed to increase it's returns on capital all the while reducing it's capital base. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 8.1% to shareholders. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.

One more thing: We've identified 5 warning signs with Alpha (at least 2 which are a bit concerning) , and understanding these would certainly be useful.

While Alpha 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.