Returns On Capital Signal Difficult Times Ahead For NEPON (TSE:7985)

When we're researching a company, it's sometimes hard to find the warning signs, but there are some financial metrics that can help spot trouble early. Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. This reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. And from a first read, things don't look too good at NEPON (TSE:7985), so let's see why.

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

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 NEPON, this is the formula:

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

0.014 = JP¥44m ÷ (JP¥5.5b - JP¥2.5b) (Based on the trailing twelve months to June 2025).

Thus, NEPON has an ROCE of 1.4%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 8.6%.

View our latest analysis for NEPON

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

So How Is NEPON's ROCE Trending?

There is reason to be cautious about NEPON, given the returns are trending downwards. To be more specific, the ROCE was 5.7% five years ago, but since then it has dropped noticeably. 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 NEPON becoming one if things continue as they have.

On a separate but related note, it's important to know that NEPON has a current liabilities to total assets ratio of 44%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

In Conclusion...

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. In spite of that, the stock has delivered a 38% return to shareholders who held over the last five years. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

On a final note, we found 4 warning signs for NEPON (3 are significant) you should be aware of.

While NEPON isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.