Here's What We Make Of JorudanLtd's (TYO:3710) Returns On Capital

If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? 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. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. In light of that, from a first glance at JorudanLtd (TYO:3710), we've spotted some signs that it could be struggling, so let's investigate.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for JorudanLtd, this is the formula:

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

0.041 = JP¥198m ÷ (JP¥5.5b - JP¥623m) (Based on the trailing twelve months to September 2020).

Thus, JorudanLtd has an ROCE of 4.1%. Ultimately, that's a low return and it under-performs the Software industry average of 15%.

View our latest analysis for JorudanLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for JorudanLtd's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of JorudanLtd, check out these free graphs here.

How Are Returns Trending?

There is reason to be cautious about JorudanLtd, given the returns are trending downwards. To be more specific, the ROCE was 10% five years ago, but since then it has dropped noticeably. Meanwhile, capital employed in the business has stayed roughly the flat over the period. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on JorudanLtd becoming one if things continue as they have.

Our Take On JorudanLtd's ROCE

In summary, it's unfortunate that JorudanLtd is generating lower returns from the same amount of capital. Despite the concerning underlying trends, the stock has actually gained 17% over the last five years, so it might be that the investors are expecting the trends to reverse. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

If you'd like to know more about JorudanLtd, we've spotted 5 warning signs, and 1 of them is potentially serious.

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. 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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