CHANGE HoldingsInc (TSE:3962) Could Be Struggling To Allocate Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. In light of that, when we looked at CHANGE HoldingsInc (TSE:3962) and its ROCE trend, we weren't exactly thrilled.

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

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on CHANGE HoldingsInc is:

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

0.14 = JP¥9.8b ÷ (JP¥89b - JP¥21b) (Based on the trailing twelve months to March 2024).

Therefore, CHANGE HoldingsInc has an ROCE of 14%. In absolute terms, that's a pretty normal return, and it's somewhat close to the IT industry average of 16%.

View our latest analysis for CHANGE HoldingsInc

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 CHANGE HoldingsInc has performed in the past in other metrics, you can view this free graph of CHANGE HoldingsInc's past earnings, revenue and cash flow.

What Does the ROCE Trend For CHANGE HoldingsInc Tell Us?

In terms of CHANGE HoldingsInc's historical ROCE movements, the trend isn't fantastic. Around four years ago the returns on capital were 29%, but since then they've fallen to 14%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

What We Can Learn From CHANGE HoldingsInc's ROCE

While returns have fallen for CHANGE HoldingsInc in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And the stock has followed suit returning a meaningful 86% to shareholders over the last five years. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

If you'd like to know about the risks facing CHANGE HoldingsInc, we've discovered 2 warning signs that you should be aware of.

While CHANGE HoldingsInc 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.

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