Nippon Seiki (TSE:7287) Is Reinvesting At Lower Rates Of Return

There are a few key trends to look for if we want to identify the next multi-bagger. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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. In light of that, when we looked at Nippon Seiki (TSE:7287) and its ROCE trend, we weren't exactly thrilled.

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Return On Capital Employed (ROCE): What Is It?

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. The formula for this calculation on Nippon Seiki is:

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

0.036 = JP¥9.2b ÷ (JP¥333b - JP¥76b) (Based on the trailing twelve months to December 2024).

Therefore, Nippon Seiki has an ROCE of 3.6%. In absolute terms, that's a low return and it also under-performs the Auto Components industry average of 6.2%.

See our latest analysis for Nippon Seiki

Above you can see how the current ROCE for Nippon Seiki 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 Nippon Seiki for free.

What Does the ROCE Trend For Nippon Seiki Tell Us?

When we looked at the ROCE trend at Nippon Seiki, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 3.6% from 5.2% five years ago. However it looks like Nippon Seiki might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a side note, Nippon Seiki has done well to pay down its current liabilities to 23% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Bottom Line On Nippon Seiki's ROCE

Bringing it all together, while we're somewhat encouraged by Nippon Seiki's reinvestment in its own business, we're aware that returns are shrinking. And with the stock having returned a mere 5.9% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

If you want to continue researching Nippon Seiki, you might be interested to know about the 2 warning signs that our analysis has discovered.

While Nippon Seiki 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.