The Returns On Capital At Disruptors (TSE:6538) Don't Inspire Confidence

What financial metrics can indicate to us that a company is maturing or even in decline? A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. Basically the company is earning less on its investments and it is also reducing its total assets. Having said that, after a brief look, Disruptors (TSE:6538) we aren't filled with optimism, but let's investigate further.

What Is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Disruptors, this is the formula:

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

0.033 = JP¥91m ÷ (JP¥3.7b - JP¥980m) (Based on the trailing twelve months to September 2024).

Therefore, Disruptors has an ROCE of 3.3%. In absolute terms, that's a low return and it also under-performs the Interactive Media and Services industry average of 14%.

Check out our latest analysis for Disruptors

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

How Are Returns Trending?

In terms of Disruptors' historical ROCE trend, it isn't fantastic. To be more specific, today's ROCE was 4.9% one year ago but has since fallen to 3.3%. In addition to that, Disruptors is now employing 41% less capital than it was one year ago. When you see both ROCE and capital employed diminishing, it can often be a sign of a mature and shrinking business that might be in structural decline. If these underlying trends continue, we wouldn't be too optimistic going forward.

The Bottom Line On Disruptors' ROCE

In summary, it's unfortunate that Disruptors is shrinking its capital base and also generating lower returns. Investors haven't taken kindly to these developments, since the stock has declined 56% from where it was five years ago. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

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

While Disruptors isn't earning the highest return, check out this free list of companies that are 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.