Is Nissin Foods (HKG:1475) Likely To Turn Things Around?

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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 Nissin Foods (HKG:1475) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Nissin Foods, this is the formula:

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

0.096 = HK$380m ÷ (HK$5.0b - HK$1.0b) (Based on the trailing twelve months to September 2020).

Therefore, Nissin Foods has an ROCE of 9.6%. In absolute terms, that's a low return and it also under-performs the Food industry average of 13%.

Check out our latest analysis for Nissin Foods

Above you can see how the current ROCE for Nissin Foods 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 Nissin Foods here for free.

The Trend Of ROCE

The returns on capital haven't changed much for Nissin Foods in recent years. Over the past five years, ROCE has remained relatively flat at around 9.6% and the business has deployed 26% more capital into its operations. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

The Bottom Line

In conclusion, Nissin Foods has been investing more capital into the business, but returns on that capital haven't increased. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 142% gain to shareholders who have held over the last three years. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

While Nissin Foods doesn't shine too bright in this respect, it's still worth seeing if the company is trading at attractive prices. You can find that out with our FREE intrinsic value estimation on our platform.

While Nissin Foods 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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