Stock Analysis

Nippon Paper Industries (TSE:3863) Could Be Struggling To Allocate Capital

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TSE:3863

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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 Paper Industries (TSE:3863), we don't think it's current trends fit the mold of a multi-bagger.

Understanding 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. The formula for this calculation on Nippon Paper Industries is:

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

0.014 = JP¥17b ÷ (JP¥1.7t - JP¥495b) (Based on the trailing twelve months to March 2024).

So, Nippon Paper Industries has an ROCE of 1.4%. In absolute terms, that's a low return and it also under-performs the Forestry industry average of 3.2%.

Check out our latest analysis for Nippon Paper Industries

TSE:3863 Return on Capital Employed August 7th 2024

Above you can see how the current ROCE for Nippon Paper Industries compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Nippon Paper Industries for free.

What Does the ROCE Trend For Nippon Paper Industries Tell Us?

When we looked at the ROCE trend at Nippon Paper Industries, we didn't gain much confidence. To be more specific, ROCE has fallen from 2.1% over the last five years. However it looks like Nippon Paper Industries might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

In Conclusion...

In summary, Nippon Paper Industries is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And in the last five years, the stock has given away 44% so the market doesn't look too hopeful on these trends strengthening any time soon. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

If you want to know some of the risks facing Nippon Paper Industries we've found 2 warning signs (1 can't be ignored!) that you should be aware of before investing here.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

Valuation is complex, but we're here to simplify it.

Discover if Nippon Paper Industries might be undervalued or overvalued with our detailed analysis, featuring fair value estimates, potential risks, dividends, insider trades, and its financial condition.

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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.