Be Wary Of EnomotoLtd (TSE:6928) And Its Returns On Capital

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. Having said that, from a first glance at EnomotoLtd (TSE:6928) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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

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 EnomotoLtd:

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

0.0065 = JP¥155m ÷ (JP¥32b - JP¥8.5b) (Based on the trailing twelve months to March 2024).

Thus, EnomotoLtd has an ROCE of 0.7%. In absolute terms, that's a low return and it also under-performs the Electronic industry average of 9.4%.

Check out our latest analysis for EnomotoLtd

Above you can see how the current ROCE for EnomotoLtd 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 EnomotoLtd for free.

How Are Returns Trending?

In terms of EnomotoLtd's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 6.9% over the last five years. 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.

Our Take On EnomotoLtd's ROCE

We're a bit apprehensive about EnomotoLtd because despite more capital being deployed in the business, returns on that capital and sales have both fallen. However the stock has delivered a 76% return to shareholders over the last five years, so investors might be expecting the trends to turn around. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

On a final note, we've found 4 warning signs for EnomotoLtd that we think you should be aware of.

While EnomotoLtd 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com