Will Nippon Pallet Pool's (TYO:4690) Growth In ROCE Persist?

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at Nippon Pallet Pool (TYO:4690) and its trend of ROCE, we really liked what we saw.

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. Analysts use this formula to calculate it for Nippon Pallet Pool:

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

0.094 = JP¥679m ÷ (JP¥10b - JP¥3.2b) (Based on the trailing twelve months to September 2020).

Thus, Nippon Pallet Pool has an ROCE of 9.4%. On its own that's a low return, but compared to the average of 6.3% generated by the Trade Distributors industry, it's much better.

See our latest analysis for Nippon Pallet Pool

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'd like to look at how Nippon Pallet Pool has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Can We Tell From Nippon Pallet Pool's ROCE Trend?

Nippon Pallet Pool's ROCE growth is quite impressive. The figures show that over the last five years, ROCE has grown 132% whilst employing roughly the same amount of capital. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.

The Bottom Line On Nippon Pallet Pool's ROCE

To sum it up, Nippon Pallet Pool is collecting higher returns from the same amount of capital, and that's impressive. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 87% return over the last five years. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

On a final note, we've found 2 warning signs for Nippon Pallet Pool that we think you should be aware of.

While Nippon Pallet Pool 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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