Slowing Rates Of Return At WITZ (TSE:4440) Leave Little Room For Excitement

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding 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. That's why when we briefly looked at WITZ's (TSE:4440) ROCE trend, we were pretty happy with what we saw.

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Understanding Return On Capital Employed (ROCE)

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. Analysts use this formula to calculate it for WITZ:

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

0.13 = JP¥352m ÷ (JP¥3.6b - JP¥892m) (Based on the trailing twelve months to November 2024).

Thus, WITZ has an ROCE of 13%. In absolute terms, that's a pretty standard return but compared to the Software industry average it falls behind.

View our latest analysis for WITZ

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 want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of WITZ .

What Does the ROCE Trend For WITZ Tell Us?

The trend of ROCE doesn't stand out much, but returns on a whole are decent. The company has consistently earned 13% for the last five years, and the capital employed within the business has risen 44% in that time. Since 13% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.

The Bottom Line On WITZ's ROCE

To sum it up, WITZ has simply been reinvesting capital steadily, at those decent rates of return. Yet over the last five years the stock has declined 24%, so the decline might provide an opening. That's why we think it'd be worthwhile to look further into this stock given the fundamentals are appealing.

If you'd like to know more about WITZ, we've spotted 3 warning signs, and 1 of them is significant.

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.