Should You Be Impressed By TENPOS HOLDINGSLtd's (TYO:2751) Returns on Capital?

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at TENPOS HOLDINGSLtd (TYO:2751) and its ROCE trend, we weren't exactly thrilled.

Return On Capital Employed (ROCE): What is it?

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. Analysts use this formula to calculate it for TENPOS HOLDINGSLtd:

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

0.067 = JP¥837m ÷ (JP¥17b - JP¥4.2b) (Based on the trailing twelve months to October 2020).

So, TENPOS HOLDINGSLtd has an ROCE of 6.7%. On its own, that's a low figure but it's around the 8.0% average generated by the Multiline Retail industry.

Check out our latest analysis for TENPOS HOLDINGSLtd

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 TENPOS HOLDINGSLtd has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

In terms of TENPOS HOLDINGSLtd's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 28%, but since then they've fallen to 6.7%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

On a related note, TENPOS HOLDINGSLtd has decreased its current liabilities to 25% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Key Takeaway

From the above analysis, we find it rather worrisome that returns on capital and sales for TENPOS HOLDINGSLtd have fallen, meanwhile the business is employing more capital than it was five years ago. In spite of that, the stock has delivered a 26% return to shareholders who held over the last five years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

If you want to know some of the risks facing TENPOS HOLDINGSLtd we've found 3 warning signs (1 is potentially serious!) that you should be aware of before investing here.

While TENPOS HOLDINGSLtd 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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