There Are Reasons To Feel Uneasy About Sharing Innovations' (TSE:4178) Returns On Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Sharing Innovations (TSE:4178), it didn't seem to tick all of these boxes.

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

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Sharing Innovations is:

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

0.10 = JP¥169m ÷ (JP¥2.6b - JP¥903m) (Based on the trailing twelve months to March 2024).

Therefore, Sharing Innovations has an ROCE of 10%. In isolation, that's a pretty standard return but against the IT industry average of 16%, it's not as good.

View our latest analysis for Sharing Innovations

Historical performance is a great place to start when researching a stock so above you can see the gauge for Sharing Innovations' ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Sharing Innovations.

How Are Returns Trending?

In terms of Sharing Innovations' historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 10% from 16% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

Our Take On Sharing Innovations' ROCE

Bringing it all together, while we're somewhat encouraged by Sharing Innovations' reinvestment in its own business, we're aware that returns are shrinking. And investors may be expecting the fundamentals to get a lot worse because the stock has crashed 75% over the last three years. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

One more thing: We've identified 3 warning signs with Sharing Innovations (at least 1 which can't be ignored) , and understanding these would certainly be useful.

While Sharing Innovations 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