The Returns On Capital At Aucfan (TSE:3674) Don't Inspire Confidence

If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? 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 indicates the company is producing less profit from its investments and its total assets are decreasing. Having said that, after a brief look, Aucfan (TSE:3674) we aren't filled with optimism, but let's investigate further.

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. Analysts use this formula to calculate it for Aucfan:

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

0.064 = JP¥312m ÷ (JP¥7.6b - JP¥2.7b) (Based on the trailing twelve months to March 2024).

Therefore, Aucfan has an ROCE of 6.4%. In absolute terms, that's a low return and it also under-performs the Multiline Retail industry average of 8.9%.

View our latest analysis for Aucfan

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

The Trend Of ROCE

We are a bit worried about the trend of returns on capital at Aucfan. To be more specific, the ROCE was 23% five years ago, but since then it has dropped noticeably. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Aucfan becoming one if things continue as they have.

What We Can Learn From Aucfan's ROCE

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. Investors haven't taken kindly to these developments, since the stock has declined 48% from where it was five years ago. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

Aucfan does come with some risks though, we found 4 warning signs in our investment analysis, and 2 of those make us uncomfortable...

While Aucfan 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. 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.