Returns On Capital At Anritsu (TSE:6754) Paint A Concerning Picture

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Although, when we looked at Anritsu (TSE:6754), 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 Anritsu is:

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

0.071 = JP¥8.9b ÷ (JP¥154b - JP¥30b) (Based on the trailing twelve months to December 2023).

Thus, Anritsu has an ROCE of 7.1%. Ultimately, that's a low return and it under-performs the Electronic industry average of 9.7%.

Check out our latest analysis for Anritsu

In the above chart we have measured Anritsu's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Anritsu .

What Does the ROCE Trend For Anritsu Tell Us?

When we looked at the ROCE trend at Anritsu, we didn't gain much confidence. To be more specific, ROCE has fallen from 10% over the last five years. However it looks like Anritsu might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

In Conclusion...

To conclude, we've found that Anritsu is reinvesting in the business, but returns have been falling. Since the stock has declined 37% over the last five years, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don't think Anritsu has the makings of a multi-bagger.

Like most companies, Anritsu does come with some risks, and we've found 2 warning signs that you should be aware of.

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.