Nikki's (TSE:6042) Returns Have Hit A Wall

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. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. However, after investigating Nikki (TSE:6042), we don't think it's current trends fit the mold of a multi-bagger.

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Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Nikki, this is the formula:

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

0.051 = JP¥897m ÷ (JP¥23b - JP¥5.7b) (Based on the trailing twelve months to June 2025).

Thus, Nikki has an ROCE of 5.1%. In absolute terms, that's a low return and it also under-performs the Auto Components industry average of 7.6%.

Check out our latest analysis for Nikki

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

What Does the ROCE Trend For Nikki Tell Us?

There are better returns on capital out there than what we're seeing at Nikki. Over the past five years, ROCE has remained relatively flat at around 5.1% and the business has deployed 93% 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 Key Takeaway

In conclusion, Nikki 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 141% gain to shareholders who have held over the last five 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.

Like most companies, Nikki does come with some risks, and we've found 5 warning signs that you should be aware of.

While Nikki may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.