Is YUMEMITSUKETAILtd (TYO:2673) Headed For Trouble?

What underlying fundamental trends can indicate that a company might be in decline? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. So after glancing at the trends within YUMEMITSUKETAILtd (TYO:2673), we weren't too hopeful.

Understanding Return On Capital Employed (ROCE)

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. Analysts use this formula to calculate it for YUMEMITSUKETAILtd:

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

0.0062 = JP¥14m ÷ (JP¥3.3b - JP¥1.1b) (Based on the trailing twelve months to September 2020).

Thus, YUMEMITSUKETAILtd has an ROCE of 0.6%. Ultimately, that's a low return and it under-performs the Online Retail industry average of 16%.

View our latest analysis for YUMEMITSUKETAILtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for YUMEMITSUKETAILtd's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of YUMEMITSUKETAILtd, check out these free graphs here.

How Are Returns Trending?

We are a bit worried about the trend of returns on capital at YUMEMITSUKETAILtd. To be more specific, the ROCE was 2.7% five years ago, but since then it has dropped noticeably. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. 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. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on YUMEMITSUKETAILtd becoming one if things continue as they have.

What We Can Learn From YUMEMITSUKETAILtd's ROCE

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. It should come as no surprise then that the stock has fallen 28% over the last five years, so it looks like investors are recognizing these changes. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

If you'd like to know more about YUMEMITSUKETAILtd, we've spotted 3 warning signs, and 2 of them don't sit too well with us.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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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