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. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. In light of that, when we looked at SecuAvail (TYO:3042) and its ROCE trend, we weren't exactly thrilled.
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. To calculate this metric for SecuAvail, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.063 = JP¥71m ÷ (JP¥1.4b - JP¥279m) (Based on the trailing twelve months to September 2020).
Thus, SecuAvail has an ROCE of 6.3%. Ultimately, that's a low return and it under-performs the IT industry average of 15%.
See 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're interested in investigating SecuAvail's past further, check out this free graph of past earnings, revenue and cash flow.
What Can We Tell From SecuAvail's ROCE Trend?
On the surface, the trend of ROCE at SecuAvail doesn't inspire confidence. Around two years ago the returns on capital were 12%, but since then they've fallen to 6.3%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.
On a related note, SecuAvail has decreased its current liabilities to 20% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.Our Take On SecuAvail's ROCE
Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for SecuAvail. However, despite the promising trends, the stock has fallen 30% over the last five years, so there might be an opportunity here for astute investors. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.
If you'd like to know more about SecuAvail, we've spotted 3 warning signs, and 1 of them is potentially serious.
While SecuAvail 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. 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.
