What We Make Of Axas HoldingsLtd's (TYO:3536) Returns On Capital

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. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. Speaking of which, we noticed some great changes in Axas HoldingsLtd's (TYO:3536) returns on capital, so let's have a look.

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 Axas HoldingsLtd, this is the formula:

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

0.076 = JP¥421m ÷ (JP¥17b - JP¥12b) (Based on the trailing twelve months to August 2020).

Thus, Axas HoldingsLtd has an ROCE of 7.6%. In absolute terms, that's a low return but it's around the Multiline Retail industry average of 8.8%.

See our latest analysis for Axas 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 want to delve into the historical earnings, revenue and cash flow of Axas HoldingsLtd, check out these free graphs here.

What Can We Tell From Axas HoldingsLtd's ROCE Trend?

While in absolute terms it isn't a high ROCE, it's promising to see that it has been moving in the right direction. Over the last four years, returns on capital employed have risen substantially to 7.6%. The amount of capital employed has increased too, by 72%. So we're very much inspired by what we're seeing at Axas HoldingsLtd thanks to its ability to profitably reinvest capital.

On a separate but related note, it's important to know that Axas HoldingsLtd has a current liabilities to total assets ratio of 68%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

What We Can Learn From Axas HoldingsLtd's ROCE

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Axas HoldingsLtd has. Investors may not be impressed by the favorable underlying trends yet because over the last three years the stock has only returned 1.4% to shareholders. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.

Axas HoldingsLtd does have some risks, we noticed 4 warning signs (and 2 which can't be ignored) we think you should know about.

While Axas 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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