Returns On Capital Are Showing Encouraging Signs At EDION (TSE:2730)

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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. With that in mind, we've noticed some promising trends at EDION (TSE:2730) so let's look a bit deeper.

What Is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on EDION is:

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

0.078 = JP¥23b ÷ (JP¥439b - JP¥151b) (Based on the trailing twelve months to December 2024).

Therefore, EDION has an ROCE of 7.8%. Ultimately, that's a low return and it under-performs the Specialty Retail industry average of 10%.

Check out our latest analysis for EDION

Historical performance is a great place to start when researching a stock so above you can see the gauge for EDION's ROCE against it's prior returns. If you're interested in investigating EDION's past further, check out this free graph covering EDION's past earnings, revenue and cash flow.

The Trend Of ROCE

EDION's ROCE growth is quite impressive. Looking at the data, we can see that even though capital employed in the business has remained relatively flat, the ROCE generated has risen by 59% over the last five years. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.

The Key Takeaway

To sum it up, EDION is collecting higher returns from the same amount of capital, and that's impressive. Since the stock has returned a staggering 153% to shareholders over the last five years, it looks like investors are recognizing these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for EDION (of which 1 shouldn't be ignored!) that you should know about.

While EDION 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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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.