e-SeikatsuLtd (TSE:3796) Is Finding It Tricky To Allocate Its Capital

If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base 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. Having said that, after a brief look, e-SeikatsuLtd (TSE:3796) we aren't filled with optimism, but let's investigate further.

Our free stock report includes 3 warning signs investors should be aware of before investing in e-SeikatsuLtd. Read for free now.

Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for e-SeikatsuLtd:

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

0.0058 = JP¥11m ÷ (JP¥2.4b - JP¥515m) (Based on the trailing twelve months to December 2024).

Therefore, e-SeikatsuLtd has an ROCE of 0.6%. Ultimately, that's a low return and it under-performs the IT industry average of 16%.

View our latest analysis for e-SeikatsuLtd

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

What Does the ROCE Trend For e-SeikatsuLtd Tell Us?

In terms of e-SeikatsuLtd's historical ROCE movements, the trend doesn't inspire confidence. About five years ago, returns on capital were 6.3%, however they're now substantially lower than that as we saw above. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. 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 e-SeikatsuLtd becoming one if things continue as they have.

In Conclusion...

In summary, it's unfortunate that e-SeikatsuLtd is generating lower returns from the same amount of capital. In spite of that, the stock has delivered a 24% return to shareholders who held over the last five years. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for e-SeikatsuLtd (of which 1 is a bit concerning!) that you should know about.

While e-SeikatsuLtd 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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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.