Investors Met With Slowing Returns on Capital At Nidec (TSE:6594)

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at Nidec (TSE:6594), it didn't seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Nidec:

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

0.07 = JP¥171b ÷ (JP¥3.4t - JP¥1.0t) (Based on the trailing twelve months to December 2024).

Therefore, Nidec has an ROCE of 7.0%. On its own, that's a low figure but it's around the 8.6% average generated by the Electrical industry.

See our latest analysis for Nidec

Above you can see how the current ROCE for Nidec compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Nidec .

How Are Returns Trending?

There are better returns on capital out there than what we're seeing at Nidec. Over the past five years, ROCE has remained relatively flat at around 7.0% and the business has deployed 60% more capital into its operations. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

In Conclusion...

In summary, Nidec has simply been reinvesting capital and generating the same low rate of return as before. Since the stock has declined 24% over the last five years, investors may not be too optimistic on this trend improving either. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

Nidec could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation for 6594 on our platform quite valuable.

While Nidec 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.