The Returns At Nippon Hume (TSE:5262) Aren't Growing

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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at Nippon Hume (TSE:5262) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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What Is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Nippon Hume:

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

0.054 = JP¥2.6b ÷ (JP¥61b - JP¥13b) (Based on the trailing twelve months to December 2024).

So, Nippon Hume has an ROCE of 5.4%. In absolute terms, that's a low return and it also under-performs the Building industry average of 7.5%.

Check out our latest analysis for Nippon Hume

Historical performance is a great place to start when researching a stock so above you can see the gauge for Nippon Hume's ROCE against it's prior returns. If you're interested in investigating Nippon Hume's past further, check out this free graph covering Nippon Hume's past earnings, revenue and cash flow .

What Can We Tell From Nippon Hume's ROCE Trend?

The returns on capital haven't changed much for Nippon Hume in recent years. The company has consistently earned 5.4% for the last five years, and the capital employed within the business has risen 28% in that time. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

The Bottom Line

In summary, Nippon Hume has simply been reinvesting capital and generating the same low rate of return as before. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 227% gain to shareholders who have held over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

One more thing, we've spotted 1 warning sign facing Nippon Hume that you might find interesting.

While Nippon Hume 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.