Adtec Plasma Technology (TSE:6668) Will Want To Turn Around Its Return Trends

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Adtec Plasma Technology (TSE:6668), it didn't seem to tick all of these boxes.

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. The formula for this calculation on Adtec Plasma Technology is:

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

0.094 = JP¥1.6b ÷ (JP¥26b - JP¥8.9b) (Based on the trailing twelve months to May 2024).

Therefore, Adtec Plasma Technology has an ROCE of 9.4%. On its own that's a low return on capital but it's in line with the industry's average returns of 9.5%.

See our latest analysis for Adtec Plasma Technology

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're interested in investigating Adtec Plasma Technology's past further, check out this free graph covering Adtec Plasma Technology's past earnings, revenue and cash flow.

The Trend Of ROCE

When we looked at the ROCE trend at Adtec Plasma Technology, we didn't gain much confidence. Around five years ago the returns on capital were 12%, but since then they've fallen to 9.4%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

The Bottom Line On Adtec Plasma Technology's ROCE

In summary, we're somewhat concerned by Adtec Plasma Technology's diminishing returns on increasing amounts of capital. Yet despite these poor fundamentals, the stock has gained a huge 209% 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.

Adtec Plasma Technology does have some risks though, and we've spotted 2 warning signs for Adtec Plasma Technology that you might be interested in.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.