Some Investors May Be Worried About FIXER's (TSE:5129) Returns On Capital

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after investigating FIXER (TSE:5129), we don't think it's current trends fit the mold of a multi-bagger.

What Is 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 FIXER:

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

0.045 = JP¥262m ÷ (JP¥6.6b - JP¥703m) (Based on the trailing twelve months to August 2024).

Thus, FIXER has an ROCE of 4.5%. Ultimately, that's a low return and it under-performs the Software industry average of 16%.

View our latest analysis for FIXER

In the above chart we have measured FIXER's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering FIXER for free.

So How Is FIXER's ROCE Trending?

In terms of FIXER's historical ROCE movements, the trend isn't fantastic. Over the last four years, returns on capital have decreased to 4.5% from 19% four years ago. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

On a side note, FIXER has done well to pay down its current liabilities to 11% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Bottom Line On FIXER's ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for FIXER have fallen, meanwhile the business is employing more capital than it was four years ago. Long term shareholders who've owned the stock over the last year have experienced a 39% depreciation in their investment, so it appears the market might not like these trends either. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

If you want to know some of the risks facing FIXER we've found 4 warning signs (2 don't sit too well with us!) that you should be aware of before investing here.

While FIXER 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.