Some Investors May Be Worried About Nikkiso's (TSE:6376) Returns On Capital

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Although, when we looked at Nikkiso (TSE:6376), it didn't seem to tick all of these boxes.

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 Nikkiso:

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

0.033 = JP¥6.9b ÷ (JP¥311b - JP¥98b) (Based on the trailing twelve months to March 2024).

Therefore, Nikkiso has an ROCE of 3.3%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 8.0%.

Check out our latest analysis for Nikkiso

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 want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Nikkiso.

What Can We Tell From Nikkiso's ROCE Trend?

On the surface, the trend of ROCE at Nikkiso doesn't inspire confidence. Around five years ago the returns on capital were 6.6%, but since then they've fallen to 3.3%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

Our Take On Nikkiso's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Nikkiso. However, despite the promising trends, the stock has fallen 10% over the last five years, so there might be an opportunity here for astute investors. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

On a separate note, we've found 1 warning sign for Nikkiso you'll probably want to know about.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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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