Nippon RietecLtd (TSE:1938) Will Want To Turn Around Its Return Trends

What are the early trends we should look for to identify a stock that could multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after briefly looking over the numbers, we don't think Nippon RietecLtd (TSE:1938) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding 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. The formula for this calculation on Nippon RietecLtd is:

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

0.051 = JP¥3.4b ÷ (JP¥87b - JP¥20b) (Based on the trailing twelve months to March 2024).

Thus, Nippon RietecLtd has an ROCE of 5.1%. In absolute terms, that's a low return and it also under-performs the Construction industry average of 7.6%.

Check out our latest analysis for Nippon RietecLtd

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 RietecLtd has performed in the past in other metrics, you can view this free graph of Nippon RietecLtd's past earnings, revenue and cash flow.

The Trend Of ROCE

When we looked at the ROCE trend at Nippon RietecLtd, we didn't gain much confidence. Around five years ago the returns on capital were 7.4%, but since then they've fallen to 5.1%. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. 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.

The Bottom Line On Nippon RietecLtd's ROCE

In summary, Nippon RietecLtd is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And in the last five years, the stock has given away 14% so the market doesn't look too hopeful on these trends strengthening any time soon. Therefore based on the analysis done in this article, we don't think Nippon RietecLtd has the makings of a multi-bagger.

One more thing to note, we've identified 1 warning sign with Nippon RietecLtd and understanding this should be part of your investment process.

While Nippon RietecLtd 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.