Adastria (TSE:2685) Is Investing Its Capital With Increasing Efficiency

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Speaking of which, we noticed some great changes in Adastria's (TSE:2685) returns on capital, so let's have a look.

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 Adastria:

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

0.22 = JP¥17b ÷ (JP¥130b - JP¥53b) (Based on the trailing twelve months to November 2023).

Therefore, Adastria has an ROCE of 22%. In absolute terms that's a great return and it's even better than the Specialty Retail industry average of 11%.

See our latest analysis for Adastria

Above you can see how the current ROCE for Adastria compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Adastria .

How Are Returns Trending?

We like the trends that we're seeing from Adastria. The data shows that returns on capital have increased substantially over the last five years to 22%. Basically the business is earning more per dollar of capital invested and in addition to that, 44% more capital is being employed now too. So we're very much inspired by what we're seeing at Adastria thanks to its ability to profitably reinvest capital.

Another thing to note, Adastria has a high ratio of current liabilities to total assets of 41%. 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. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

What We Can Learn From Adastria's ROCE

To sum it up, Adastria has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And with a respectable 46% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

On a separate note, we've found 1 warning sign for Adastria you'll probably want to know about.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.