Here's What's Concerning About Shindengen Electric ManufacturingLtd's (TSE:6844) Returns On Capital

What underlying fundamental trends can indicate that a company might be in decline? When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. This indicates the company is producing less profit from its investments and its total assets are decreasing. And from a first read, things don't look too good at Shindengen Electric ManufacturingLtd (TSE:6844), so let's see why.

What Is Return On Capital Employed (ROCE)?

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 Shindengen Electric ManufacturingLtd is:

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

0.009 = JP¥1.0b ÷ (JP¥142b - JP¥30b) (Based on the trailing twelve months to December 2024).

So, Shindengen Electric ManufacturingLtd has an ROCE of 0.9%. In absolute terms, that's a low return and it also under-performs the Semiconductor industry average of 12%.

View our latest analysis for Shindengen Electric ManufacturingLtd

In the above chart we have measured Shindengen Electric ManufacturingLtd's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Shindengen Electric ManufacturingLtd .

What The Trend Of ROCE Can Tell Us

We are a bit worried about the trend of returns on capital at Shindengen Electric ManufacturingLtd. About five years ago, returns on capital were 3.2%, however they're now substantially lower than that as we saw above. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. If these trends continue, we wouldn't expect Shindengen Electric ManufacturingLtd to turn into a multi-bagger.

The Bottom Line

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. Despite the concerning underlying trends, the stock has actually gained 5.0% over the last five years, so it might be that the investors are expecting the trends to reverse. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

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

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.