Some Investors May Be Worried About Nakakita Seisakusho's (TSE:6496) Returns On Capital

If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. And from a first read, things don't look too good at Nakakita Seisakusho (TSE:6496), so let's see why.

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Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Nakakita Seisakusho is:

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

0.034 = JP¥893m ÷ (JP¥33b - JP¥7.1b) (Based on the trailing twelve months to November 2024).

Therefore, Nakakita Seisakusho has an ROCE of 3.4%. Ultimately, that's a low return and it under-performs the Machinery industry average of 7.8%.

Check out our latest analysis for Nakakita Seisakusho

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

What The Trend Of ROCE Can Tell Us

In terms of Nakakita Seisakusho's historical ROCE movements, the trend doesn't inspire confidence. About five years ago, returns on capital were 4.6%, however they're now substantially lower than that as we saw above. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Nakakita Seisakusho becoming one if things continue as they have.

The Bottom Line

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. Yet despite these concerning fundamentals, the stock has performed strongly with a 63% return over the last five years, so investors appear very optimistic. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

One more thing: We've identified 3 warning signs with Nakakita Seisakusho (at least 1 which shouldn't be ignored) , and understanding these would certainly be useful.

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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.