Investors Will Want Generation PassLtd's (TSE:3195) Growth In ROCE To Persist

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. Speaking of which, we noticed some great changes in Generation PassLtd's (TSE:3195) returns on capital, so let's have a look.

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Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Generation PassLtd is:

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

0.022 = JP¥43m ÷ (JP¥4.7b - JP¥2.8b) (Based on the trailing twelve months to January 2025).

Thus, Generation PassLtd has an ROCE of 2.2%. In absolute terms, that's a low return and it also under-performs the Multiline Retail industry average of 11%.

See our latest analysis for Generation PassLtd

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're interested in investigating Generation PassLtd's past further, check out this free graph covering Generation PassLtd's past earnings, revenue and cash flow.

What Can We Tell From Generation PassLtd's ROCE Trend?

Generation PassLtd has broken into the black (profitability) and we're sure it's a sight for sore eyes. The company now earns 2.2% on its capital, because five years ago it was incurring losses. While returns have increased, the amount of capital employed by Generation PassLtd has remained flat over the period. That being said, while an increase in efficiency is no doubt appealing, it'd be helpful to know if the company does have any investment plans going forward. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.

On a separate but related note, it's important to know that Generation PassLtd has a current liabilities to total assets ratio of 59%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

Our Take On Generation PassLtd's ROCE

As discussed above, Generation PassLtd appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. And since the stock has fallen 25% over the last five years, there might be an opportunity here. So researching this company further and determining whether or not these trends will continue seems justified.

One more thing: We've identified 3 warning signs with Generation PassLtd (at least 2 which are significant) , and understanding these would certainly be useful.

While Generation PassLtd 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.