Here's What To Make Of Nippon Shikizai's (TSE:4920) Decelerating Rates Of Return

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. However, after investigating Nippon Shikizai (TSE:4920), we don't think it's current trends fit the mold of a multi-bagger.

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

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

0.054 = JP¥582m ÷ (JP¥17b - JP¥6.5b) (Based on the trailing twelve months to November 2024).

Thus, Nippon Shikizai has an ROCE of 5.4%. In absolute terms, that's a low return and it also under-performs the Personal Products industry average of 9.0%.

See our latest analysis for Nippon Shikizai

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

What Can We Tell From Nippon Shikizai's ROCE Trend?

There hasn't been much to report for Nippon Shikizai's returns and its level of capital employed because both metrics have been steady for the past five years. This tells us the company isn't reinvesting in itself, so it's plausible that it's past the growth phase. So don't be surprised if Nippon Shikizai doesn't end up being a multi-bagger in a few years time.

The Bottom Line On Nippon Shikizai's ROCE

In a nutshell, Nippon Shikizai has been trudging along with the same returns from the same amount of capital over the last five years. And investors appear hesitant that the trends will pick up because the stock has fallen 34% in the last five years. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

Nippon Shikizai does have some risks, we noticed 5 warning signs (and 1 which is a bit unpleasant) we think you should know about.

While Nippon Shikizai may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.