Be Wary Of Fujipream (TYO:4237) And Its Returns On Capital

When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. This reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. And from a first read, things don't look too good at Fujipream (TYO:4237), so let's see why.

What is Return On Capital Employed (ROCE)?

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. To calculate this metric for Fujipream, this is the formula:

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

0.035 = JP¥346m ÷ (JP¥14b - JP¥4.5b) (Based on the trailing twelve months to December 2020).

Therefore, Fujipream has an ROCE of 3.5%. Ultimately, that's a low return and it under-performs the Electronic industry average of 7.3%.

See our latest analysis for Fujipream

Historical performance is a great place to start when researching a stock so above you can see the gauge for Fujipream's ROCE against it's prior returns. If you're interested in investigating Fujipream's past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From Fujipream's ROCE Trend?

We are a bit worried about the trend of returns on capital at Fujipream. Unfortunately the returns on capital have diminished from the 6.2% that they were earning five years ago. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. If these trends continue, we wouldn't expect Fujipream to turn into a multi-bagger.

The Bottom Line

In summary, it's unfortunate that Fujipream is generating lower returns from the same amount of capital. Yet despite these concerning fundamentals, the stock has performed strongly with a 88% return over the last five years, so investors appear very optimistic. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

One more thing: We've identified 5 warning signs with Fujipream (at least 2 which shouldn't be ignored) , and understanding them would certainly be useful.

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. 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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