The Returns On Capital At BroadBand Tower (TYO:3776) Don't Inspire Confidence

There are a few key trends to look for if we want to identify the next multi-bagger. 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at BroadBand Tower (TYO:3776), it didn't seem to tick all of these boxes.

Return On Capital Employed (ROCE): What is it?

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. The formula for this calculation on BroadBand Tower is:

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

0.027 = JP¥525m ÷ (JP¥23b - JP¥4.2b) (Based on the trailing twelve months to December 2020).

Thus, BroadBand Tower has an ROCE of 2.7%. In absolute terms, that's a low return and it also under-performs the IT industry average of 13%.

See our latest analysis for BroadBand Tower

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 BroadBand Tower has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is BroadBand Tower's ROCE Trending?

When we looked at the ROCE trend at BroadBand Tower, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 2.7% from 5.2% five years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

On a side note, BroadBand Tower has done well to pay down its current liabilities to 18% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Key Takeaway

In summary, BroadBand Tower is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Since the stock has gained an impressive 45% over the last five years, investors must think there's better things to come. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

On a separate note, we've found 3 warning signs for BroadBand Tower you'll probably want to know about.

While BroadBand Tower 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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