Ascentech K.K's (TSE:3565) Returns Have Hit A Wall

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. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Although, when we looked at Ascentech K.K (TSE:3565), 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. To calculate this metric for Ascentech K.K, this is the formula:

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

0.19 = JP¥607m ÷ (JP¥4.6b - JP¥1.5b) (Based on the trailing twelve months to January 2024).

So, Ascentech K.K has an ROCE of 19%. On its own, that's a standard return, however it's much better than the 16% generated by the IT industry.

View our latest analysis for Ascentech K.K

Historical performance is a great place to start when researching a stock so above you can see the gauge for Ascentech K.K's ROCE against it's prior returns. If you'd like to look at how Ascentech K.K has performed in the past in other metrics, you can view this free graph of Ascentech K.K's past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

Over the past , Ascentech K.K's ROCE and capital employed have both remained mostly flat. Businesses with these traits tend to be mature and steady operations because they're past the growth phase. With that in mind, unless investment picks up again in the future, we wouldn't expect Ascentech K.K to be a multi-bagger going forward.

What We Can Learn From Ascentech K.K's ROCE

We can conclude that in regards to Ascentech K.K's returns on capital employed and the trends, there isn't much change to report on. Since the stock has declined 47% over the last five years, investors may not be too optimistic on this trend improving either. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

On a separate note, we've found 4 warning signs for Ascentech K.K 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com