We Like Nagaoka International's (TSE:6239) Returns And Here's How They're Trending

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. And in light of that, the trends we're seeing at Nagaoka International's (TSE:6239) look very promising so lets take a look.

What Is Return On Capital Employed (ROCE)?

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. Analysts use this formula to calculate it for Nagaoka International:

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

0.30 = JP¥1.8b ÷ (JP¥8.2b - JP¥2.1b) (Based on the trailing twelve months to March 2024).

Therefore, Nagaoka International has an ROCE of 30%. In absolute terms that's a great return and it's even better than the Energy Services industry average of 8.5%.

View our latest analysis for Nagaoka International

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

What Can We Tell From Nagaoka International's ROCE Trend?

Investors would be pleased with what's happening at Nagaoka International. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 30%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 105%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

On a related note, the company's ratio of current liabilities to total assets has decreased to 26%, which basically reduces it's funding from the likes of short-term creditors or suppliers. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance.

The Bottom Line On Nagaoka International's ROCE

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Nagaoka International has. Since the stock has returned a staggering 234% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it's worth looking further into this stock because if Nagaoka International can keep these trends up, it could have a bright future ahead.

One more thing: We've identified 3 warning signs with Nagaoka International (at least 1 which is potentially serious) , and understanding these would certainly be useful.

High returns are a key ingredient to strong performance, so check out our free list ofstocks 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.

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