Investors Could Be Concerned With Aichi Tokei Denki's (TSE:7723) Returns On Capital

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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Having said that, from a first glance at Aichi Tokei Denki (TSE:7723) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

We've discovered 2 warning signs about Aichi Tokei Denki. View them for free.

Understanding 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 Aichi Tokei Denki:

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

0.058 = JP¥2.9b ÷ (JP¥60b - JP¥10b) (Based on the trailing twelve months to December 2024).

Therefore, Aichi Tokei Denki has an ROCE of 5.8%. In absolute terms, that's a low return and it also under-performs the Electronic industry average of 9.0%.

See our latest analysis for Aichi Tokei Denki

Historical performance is a great place to start when researching a stock so above you can see the gauge for Aichi Tokei Denki's ROCE against it's prior returns. If you'd like to look at how Aichi Tokei Denki has performed in the past in other metrics, you can view this free graph of Aichi Tokei Denki's past earnings, revenue and cash flow.

What Does the ROCE Trend For Aichi Tokei Denki Tell Us?

When we looked at the ROCE trend at Aichi Tokei Denki, we didn't gain much confidence. Around five years ago the returns on capital were 7.8%, but since then they've fallen to 5.8%. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

The Bottom Line On Aichi Tokei Denki's ROCE

Bringing it all together, while we're somewhat encouraged by Aichi Tokei Denki's reinvestment in its own business, we're aware that returns are shrinking. Although the market must be expecting these trends to improve because the stock has gained 53% over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

If you'd like to know about the risks facing Aichi Tokei Denki, we've discovered 2 warning signs that you should be aware of.

While Aichi Tokei Denki isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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

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.