Here's What's Concerning About Nakano RefrigeratorsLtd (TYO:6411)

When we're researching a company, it's sometimes hard to find the warning signs, but there are some financial metrics that can help spot trouble early. A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. So after glancing at the trends within Nakano RefrigeratorsLtd (TYO:6411), we weren't too hopeful.

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. The formula for this calculation on Nakano RefrigeratorsLtd is:

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

0.037 = JP¥1.1b ÷ (JP¥33b - JP¥4.0b) (Based on the trailing twelve months to September 2020).

Thus, Nakano RefrigeratorsLtd has an ROCE of 3.7%. Ultimately, that's a low return and it under-performs the Machinery industry average of 6.8%.

View our latest analysis for Nakano RefrigeratorsLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Nakano RefrigeratorsLtd's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Nakano RefrigeratorsLtd, check out these free graphs here.

So How Is Nakano RefrigeratorsLtd's ROCE Trending?

We are a bit worried about the trend of returns on capital at Nakano RefrigeratorsLtd. To be more specific, the ROCE was 10% five years ago, but since then it has dropped noticeably. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Nakano RefrigeratorsLtd becoming one if things continue as they have.

On a side note, Nakano RefrigeratorsLtd has done well to pay down its current liabilities to 12% 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. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

Our Take On Nakano RefrigeratorsLtd's ROCE

In summary, it's unfortunate that Nakano RefrigeratorsLtd is generating lower returns from the same amount of capital. The market must be rosy on the stock's future because even though the underlying trends aren't too encouraging, the stock has soared 132%. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

One more thing: We've identified 3 warning signs with Nakano RefrigeratorsLtd (at least 1 which is significant) , and understanding these would certainly be useful.

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This article by Simply Wall St is general in nature. 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.
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