Some Investors May Be Worried About NIC Autotec's (TYO:5742) Returns On Capital

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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Although, when we looked at NIC Autotec (TYO:5742), it didn't seem to tick all of these boxes.

What is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for NIC Autotec:

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

0.038 = JP¥218m ÷ (JP¥8.1b - JP¥2.4b) (Based on the trailing twelve months to March 2021).

Thus, NIC Autotec has an ROCE of 3.8%. In absolute terms, that's a low return and it also under-performs the Metals and Mining industry average of 5.4%.

View 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'd like to look at how NIC Autotec has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Can We Tell From NIC Autotec's ROCE Trend?

On the surface, the trend of ROCE at NIC Autotec doesn't inspire confidence. Over the last five years, returns on capital have decreased to 3.8% from 14% five years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

The Bottom Line On NIC Autotec's ROCE

In summary, NIC Autotec is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Since the stock has gained an impressive 49% over the last five years, investors must think there's better things to come. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

One more thing: We've identified 3 warning signs with NIC Autotec (at least 1 which doesn't sit too well with us) , and understanding these would certainly be useful.

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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