Should You Be Impressed By NIC Autotec's (TYO:5742) Returns on Capital?

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. However, after investigating NIC Autotec (TYO:5742), we don't think it's current trends fit the mold of a multi-bagger.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on NIC Autotec is:

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

0.041 = JP¥247m ÷ (JP¥7.8b - JP¥1.8b) (Based on the trailing twelve months to December 2020).

Thus, NIC Autotec has an ROCE of 4.1%. In absolute terms, that's a low return and it also under-performs the Metals and Mining industry average of 5.4%.

Check out our latest analysis for NIC Autotec

Historical performance is a great place to start when researching a stock so above you can see the gauge for NIC Autotec's ROCE against it's prior returns. If you're interested in investigating NIC Autotec's past further, check out this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

In terms of NIC Autotec's historical ROCE movements, the trend isn't fantastic. Around four years ago the returns on capital were 18%, but since then they've fallen to 4.1%. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

On a related note, NIC Autotec has decreased its current liabilities to 23% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

Our Take On NIC Autotec's ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for NIC Autotec have fallen, meanwhile the business is employing more capital than it was four years ago. But investors must be expecting an improvement of sorts because over the last five yearsthe stock has delivered a respectable 93% return. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

NIC Autotec does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those doesn't sit too well with us...

While NIC Autotec 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. 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.
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