There's Been No Shortage Of Growth Recently For Shin Nippon Air Technologies' (TSE:1952) Returns On Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. With that in mind, we've noticed some promising trends at Shin Nippon Air Technologies (TSE:1952) so let's look a bit deeper.

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. To calculate this metric for Shin Nippon Air Technologies, this is the formula:

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

0.13 = JP¥9.2b ÷ (JP¥117b - JP¥48b) (Based on the trailing twelve months to March 2024).

Therefore, Shin Nippon Air Technologies has an ROCE of 13%. In absolute terms, that's a satisfactory return, but compared to the Building industry average of 7.1% it's much better.

See our latest analysis for Shin Nippon Air Technologies

Historical performance is a great place to start when researching a stock so above you can see the gauge for Shin Nippon Air Technologies' ROCE against it's prior returns. If you'd like to look at how Shin Nippon Air Technologies has performed in the past in other metrics, you can view this free graph of Shin Nippon Air Technologies' past earnings, revenue and cash flow.

So How Is Shin Nippon Air Technologies' ROCE Trending?

We like the trends that we're seeing from Shin Nippon Air Technologies. The data shows that returns on capital have increased substantially over the last five years to 13%. Basically the business is earning more per dollar of capital invested and in addition to that, 51% more capital is being employed now too. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

One more thing to note, Shin Nippon Air Technologies has decreased current liabilities to 41% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books. Nevertheless, there are some potential risks the company is bearing with current liabilities that high, so just keep that in mind.

Our Take On Shin Nippon Air Technologies' ROCE

In summary, it's great to see that Shin Nippon Air Technologies can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. In light of that, we think it's worth looking further into this stock because if Shin Nippon Air Technologies can keep these trends up, it could have a bright future ahead.

Shin Nippon Air Technologies does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those is concerning...

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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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.

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