Is Nakano RefrigeratorsLtd (TYO:6411) Struggling?

What underlying fundamental trends can indicate that a company might be in decline? 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 we looked into Nakano RefrigeratorsLtd (TYO:6411), the trends above didn't look too great.

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. Analysts use this formula to calculate it for Nakano RefrigeratorsLtd:

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

0.04 = JP¥1.2b ÷ (JP¥34b - JP¥4.5b) (Based on the trailing twelve months to December 2020).

Thus, Nakano RefrigeratorsLtd has an ROCE of 4.0%. Ultimately, that's a low return and it under-performs the Machinery industry average of 6.4%.

View our latest analysis for Nakano RefrigeratorsLtd

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 Nakano RefrigeratorsLtd has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

In terms of Nakano RefrigeratorsLtd's historical ROCE movements, the trend doesn't inspire confidence. To be more specific, the ROCE was 11% 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. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. 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 13% 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.

In Conclusion...

In summary, it's unfortunate that Nakano RefrigeratorsLtd is generating lower returns from the same amount of capital. Yet despite these poor fundamentals, the stock has gained a huge 139% over the last five years, so investors appear very optimistic. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

If you want to know some of the risks facing Nakano RefrigeratorsLtd we've found 3 warning signs (1 makes us a bit uncomfortable!) that you should be aware of before investing here.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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