Sansan (TSE:4443) Is Looking To Continue Growing Its Returns On Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, 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. So on that note, Sansan (TSE:4443) looks quite promising in regards to its trends of return on capital.

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

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. Analysts use this formula to calculate it for Sansan:

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

0.022 = JP¥399m ÷ (JP¥33b - JP¥14b) (Based on the trailing twelve months to February 2024).

Thus, Sansan has an ROCE of 2.2%. Ultimately, that's a low return and it under-performs the Software industry average of 15%.

See our latest analysis for Sansan

Above you can see how the current ROCE for Sansan compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Sansan for free.

How Are Returns Trending?

Sansan has recently broken into profitability so their prior investments seem to be paying off. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 2.2% on its capital. Not only that, but the company is utilizing 493% more capital than before, but that's to be expected from a company trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

On a related note, the company's ratio of current liabilities to total assets has decreased to 44%, which basically reduces it's funding from the likes of short-term creditors or suppliers. So this improvement in ROCE has come from the business' underlying economics, which is great to see. However, current liabilities are still at a pretty high level, so just be aware that this can bring with it some risks.

Our Take On Sansan's ROCE

To the delight of most shareholders, Sansan has now broken into profitability. And since the stock has fallen 35% over the last three years, there might be an opportunity here. So researching this company further and determining whether or not these trends will continue seems justified.

On a separate note, we've found 1 warning sign for Sansan you'll probably want to know about.

While Sansan 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.