Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at Accrete (TSE:4395), it didn't seem to tick all of these boxes.
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. The formula for this calculation on Accrete is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.057 = JP¥162m ÷ (JP¥4.0b - JP¥1.1b) (Based on the trailing twelve months to March 2024).
Therefore, Accrete has an ROCE of 5.7%. Ultimately, that's a low return and it under-performs the Wireless Telecom industry average of 11%.
Check out our latest analysis for Accrete
Historical performance is a great place to start when researching a stock so above you can see the gauge for Accrete's ROCE against it's prior returns. If you're interested in investigating Accrete's past further, check out this free graph covering Accrete's past earnings, revenue and cash flow.
How Are Returns Trending?
When we looked at the ROCE trend at Accrete, we didn't gain much confidence. To be more specific, ROCE has fallen from 31% over the last two 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.
In Conclusion...
In summary, we're somewhat concerned by Accrete's diminishing returns on increasing amounts of capital. Investors haven't taken kindly to these developments, since the stock has declined 27% from where it was five years ago. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.
If you want to know some of the risks facing Accrete we've found 2 warning signs (1 is a bit unpleasant!) that you should be aware of before investing here.
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.
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About TSE:4395
Adequate balance sheet low.
