Here's What We Make Of Alpha Group's (TYO:3322) Returns On Capital

What underlying fundamental trends can indicate that a company might be 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 combination can tell you that not only is the company investing less, it's earning less on what it does invest. On that note, looking into Alpha Group (TYO:3322), we weren't too upbeat about how things were going.

What is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Alpha Group, this is the formula:

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

0.034 = JP¥174m ÷ (JP¥7.9b - JP¥2.8b) (Based on the trailing twelve months to September 2020).

So, Alpha Group has an ROCE of 3.4%. Ultimately, that's a low return and it under-performs the Specialty Retail industry average of 9.0%.

View our latest analysis for Alpha Group

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

How Are Returns Trending?

In terms of Alpha Group's historical ROCE movements, the trend doesn't inspire confidence. Unfortunately the returns on capital have diminished from the 14% that they were earning five years ago. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Alpha Group becoming one if things continue as they have.

The Key Takeaway

In summary, it's unfortunate that Alpha Group is generating lower returns from the same amount of capital. In spite of that, the stock has delivered a 33% return to shareholders who held over 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.

Alpha Group does have some risks, we noticed 3 warning signs (and 1 which is a bit unpleasant) we think you should know about.

While Alpha Group 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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