Investors Will Want Nippon Seiro's (TSE:5010) Growth In ROCE To Persist

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. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. With that in mind, we've noticed some promising trends at Nippon Seiro (TSE:5010) so let's look a bit deeper.

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. To calculate this metric for Nippon Seiro, this is the formula:

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

0.11 = JP¥1.4b ÷ (JP¥29b - JP¥17b) (Based on the trailing twelve months to June 2024).

Therefore, Nippon Seiro has an ROCE of 11%. In absolute terms, that's a satisfactory return, but compared to the Oil and Gas industry average of 7.5% it's much better.

See our latest analysis for Nippon Seiro

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Nippon Seiro's past further, check out this free graph covering Nippon Seiro's past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

It's great to see that Nippon Seiro has started to generate some pre-tax earnings from prior investments. While the business is profitable now, it used to be incurring losses on invested capital five years ago. At first glance, it seems the business is getting more proficient at generating returns, because over the same period, the amount of capital employed has reduced by 22%. The reduction could indicate that the company is selling some assets, and considering returns are up, they appear to be selling the right ones.

On a separate but related note, it's important to know that Nippon Seiro has a current liabilities to total assets ratio of 57%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line On Nippon Seiro's ROCE

In summary, it's great to see that Nippon Seiro has been able to turn things around and earn higher returns on lower amounts of capital. Considering the stock has delivered 39% to its stockholders over the last five years, it may be fair to think that investors aren't fully aware of the promising trends yet. So with that in mind, we think the stock deserves further research.

On a final note, we found 3 warning signs for Nippon Seiro (2 are concerning) you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.