There Are Reasons To Feel Uneasy About Nikki's (TSE:6042) Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. 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. Analysts use this formula to calculate it for Nikki:

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

0.05 = JP¥886m ÷ (JP¥23b - JP¥5.7b) (Based on the trailing twelve months to March 2025).

Thus, Nikki has an ROCE of 5.0%. In absolute terms, that's a low return and it also under-performs the Auto Components industry average of 6.8%.

Check out our latest analysis for Nikki

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Nikki.

What Can We Tell From Nikki's ROCE Trend?

In terms of Nikki's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 6.9%, but since then they've fallen to 5.0%. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

The Bottom Line

We're a bit apprehensive about Nikki because despite more capital being deployed in the business, returns on that capital and sales have both fallen. But investors must be expecting an improvement of sorts because over the last five yearsthe stock has delivered a respectable 82% return. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

Nikki does have some risks though, and we've spotted 4 warning signs for Nikki that you might be interested in.

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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.