Is AUTOWAVE (TYO:2666) Struggling?

When researching a stock for investment, what can tell us that the company is in decline? Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. This indicates the company is producing less profit from its investments and its total assets are decreasing. So after we looked into AUTOWAVE (TYO:2666), the trends above didn't look too great.

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 AUTOWAVE, this is the formula:

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

0.0059 = JP¥42m ÷ (JP¥8.0b - JP¥935m) (Based on the trailing twelve months to September 2020).

So, AUTOWAVE has an ROCE of 0.6%. Ultimately, that's a low return and it under-performs the Specialty Retail industry average of 9.1%.

View our latest analysis for AUTOWAVE

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'd like to look at how AUTOWAVE has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For AUTOWAVE Tell Us?

We are a bit worried about the trend of returns on capital at AUTOWAVE. About five years ago, returns on capital were 1.0%, however they're now substantially lower than that as we saw above. Meanwhile, capital employed in the business has stayed roughly the flat over the period. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. If these trends continue, we wouldn't expect AUTOWAVE to turn into a multi-bagger.

What We Can Learn From AUTOWAVE's ROCE

In summary, it's unfortunate that AUTOWAVE is generating lower returns from the same amount of capital. Investors must expect better things on the horizon though because the stock has risen 15% in the last five years. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

AUTOWAVE does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those is a bit concerning...

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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This article by Simply Wall St is general in nature. 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.
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