Nikon (TSE:7731) Is Finding It Tricky To Allocate Its Capital

When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. So after we looked into Nikon (TSE:7731), the trends above didn't look too great.

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

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. The formula for this calculation on Nikon is:

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

0.05 = JP¥42b ÷ (JP¥1.2t - JP¥357b) (Based on the trailing twelve months to June 2024).

Therefore, Nikon has an ROCE of 5.0%. Ultimately, that's a low return and it under-performs the Consumer Durables industry average of 6.9%.

Check out our latest analysis for Nikon

In the above chart we have measured Nikon's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Nikon .

So How Is Nikon's ROCE Trending?

There is reason to be cautious about Nikon, given the returns are trending downwards. To be more specific, the ROCE was 10% five years ago, but since then it has dropped noticeably. Meanwhile, capital employed in the business has stayed roughly the flat over the period. 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. If these trends continue, we wouldn't expect Nikon to turn into a multi-bagger.

What We Can Learn From Nikon's ROCE

In summary, it's unfortunate that Nikon is generating lower returns from the same amount of capital. In spite of that, the stock has delivered a 37% return to shareholders who held over the last five years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

If you want to continue researching Nikon, you might be interested to know about the 1 warning sign that our analysis has discovered.

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.