NICHIDEN (TSE:9902) Is Reinvesting At Lower Rates Of Return

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we looked at NICHIDEN (TSE:9902), 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. The formula for this calculation on NICHIDEN is:

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

0.06 = JP¥5.8b ÷ (JP¥128b - JP¥31b) (Based on the trailing twelve months to March 2024).

So, NICHIDEN has an ROCE of 6.0%. In absolute terms, that's a low return but it's around the Trade Distributors industry average of 7.4%.

Check out our latest analysis for NICHIDEN

Historical performance is a great place to start when researching a stock so above you can see the gauge for NICHIDEN's ROCE against it's prior returns. If you'd like to look at how NICHIDEN has performed in the past in other metrics, you can view this free graph of NICHIDEN's past earnings, revenue and cash flow.

So How Is NICHIDEN's ROCE Trending?

In terms of NICHIDEN's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 8.3%, but since then they've fallen to 6.0%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

The Bottom Line On NICHIDEN's ROCE

Bringing it all together, while we're somewhat encouraged by NICHIDEN's reinvestment in its own business, we're aware that returns are shrinking. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 122% 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.

Like most companies, NICHIDEN does come with some risks, and we've found 1 warning sign that you should be aware of.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com