Returns Are Gaining Momentum At BroadBand Tower (TSE:3776)

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So when we looked at BroadBand Tower (TSE:3776) and its trend of ROCE, we really liked what we saw.

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. The formula for this calculation on BroadBand Tower is:

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

0.0018 = JP¥27m ÷ (JP¥19b - JP¥4.2b) (Based on the trailing twelve months to March 2024).

Therefore, BroadBand Tower has an ROCE of 0.2%. In absolute terms, that's a low return and it also under-performs the IT industry average of 16%.

View 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 BroadBand Tower's past earnings, revenue and cash flow.

How Are Returns Trending?

Like most people, we're pleased that BroadBand Tower is now generating some pretax earnings. While the business is profitable now, it used to be incurring losses on invested capital five years ago. At first glance, it seems the business is getting more proficient at generating returns, because over the same period, the amount of capital employed has reduced by 22%. This could potentially mean that the company is selling some of its assets.

What We Can Learn From BroadBand Tower's ROCE

In summary, it's great to see that BroadBand Tower has been able to turn things around and earn higher returns on lower amounts of capital. Astute investors may have an opportunity here because the stock has declined 15% in the last five years. So researching this company further and determining whether or not these trends will continue seems justified.

If you'd like to know more about BroadBand Tower, we've spotted 4 warning signs, and 2 of them are a bit concerning.

While BroadBand Tower 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. 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