The Returns On Capital At West Japan Railway (TSE:9021) Don't Inspire Confidence

What financial metrics can indicate to us that a company is maturing or even in decline? A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. Having said that, after a brief look, West Japan Railway (TSE:9021) we aren't filled with optimism, but let's investigate further.

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. To calculate this metric for West Japan Railway, this is the formula:

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

0.061 = JP¥184b ÷ (JP¥3.7t - JP¥623b) (Based on the trailing twelve months to December 2024).

Thus, West Japan Railway has an ROCE of 6.1%. In absolute terms, that's a low return but it's around the Transportation industry average of 5.1%.

Check out our latest analysis for West Japan Railway

Above you can see how the current ROCE for West Japan Railway compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for West Japan Railway .

The Trend Of ROCE

In terms of West Japan Railway's historical ROCE movements, the trend doesn't inspire confidence. About five years ago, returns on capital were 7.8%, however they're now substantially lower than that as we saw above. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. If these trends continue, we wouldn't expect West Japan Railway to turn into a multi-bagger.

The Bottom Line On West Japan Railway's ROCE

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. Investors haven't taken kindly to these developments, since the stock has declined 21% from where it was five years ago. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

West Japan Railway does have some risks though, and we've spotted 2 warning signs for West Japan Railway that you might be interested in.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.