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. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Having said that, from a first glance at SecuAvail (TYO:3042) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
Return On Capital Employed (ROCE): What is it?
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on SecuAvail is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.075 = JP¥88m ÷ (JP¥1.5b - JP¥291m) (Based on the trailing twelve months to December 2020).
So, SecuAvail has an ROCE of 7.5%. In absolute terms, that's a low return and it also under-performs the IT industry average of 13%.
Check out our latest analysis for SecuAvail
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'd like to look at how SecuAvail has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
The Trend Of ROCE
In terms of SecuAvail's historical ROCE trend, it doesn't exactly demand attention. The company has employed 53% more capital in the last two years, and the returns on that capital have remained stable at 7.5%. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.
Our Take On SecuAvail's ROCE
In conclusion, SecuAvail has been investing more capital into the business, but returns on that capital haven't increased. And investors may be recognizing these trends since the stock has only returned a total of 3.0% to shareholders over the last five years. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.
If you'd like to know about the risks facing SecuAvail, we've discovered 2 warning signs that you should be aware of.
While SecuAvail 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. 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.
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About TSE:3042
Flawless balance sheet minimal.
