Returns On Capital Signal Tricky Times Ahead For TENPOS HOLDINGSLtd (TYO:2751)

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after investigating TENPOS HOLDINGSLtd (TYO:2751), we don't think it's current trends fit the mold of a multi-bagger.

What is 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. To calculate this metric for TENPOS HOLDINGSLtd, this is the formula:

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

0.073 = JP¥875m ÷ (JP¥16b - JP¥4.2b) (Based on the trailing twelve months to January 2021).

Thus, TENPOS HOLDINGSLtd has an ROCE of 7.3%. In absolute terms, that's a low return but it's around the Multiline Retail industry average of 8.0%.

Check out our latest analysis for TENPOS HOLDINGSLtd

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

So How Is TENPOS HOLDINGSLtd's ROCE Trending?

On the surface, the trend of ROCE at TENPOS HOLDINGSLtd doesn't inspire confidence. To be more specific, ROCE has fallen from 28% over the last five years. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

The Key Takeaway

In summary, we're somewhat concerned by TENPOS HOLDINGSLtd's diminishing returns on increasing amounts of capital. Investors must expect better things on the horizon though because the stock has risen 35% 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.

TENPOS HOLDINGSLtd does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those is potentially serious...

While TENPOS HOLDINGSLtd 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. 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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