Can Nireco (TYO:6863) Continue To Grow Its Returns On Capital?

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So on that note, Nireco (TYO:6863) looks quite promising in regards to its trends of return on capital.

What is 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. To calculate this metric for Nireco, this is the formula:

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

0.059 = JP¥806m ÷ (JP¥15b - JP¥1.3b) (Based on the trailing twelve months to September 2020).

Thus, Nireco has an ROCE of 5.9%. In absolute terms, that's a low return but it's around the Machinery industry average of 6.8%.

Check out our latest analysis for Nireco

In the above chart we have measured Nireco's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Nireco.

How Are Returns Trending?

Nireco has not disappointed with their ROCE growth. The figures show that over the last five years, ROCE has grown 100% 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. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.

What We Can Learn From Nireco's ROCE

In summary, we're delighted to see that Nireco has been able to increase efficiencies and earn higher rates of return on the same amount of capital. And with a respectable 63% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. 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.

One more thing to note, we've identified 2 warning signs with Nireco and understanding these should be part of your investment process.

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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