The Returns At Nankai Chemical CompanyLimited (TSE:4040) Aren't Growing

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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. However, after investigating Nankai Chemical CompanyLimited (TSE:4040), we don't think it's current trends fit the mold of a multi-bagger.

AI is about to change healthcare. These 20 stocks are working on everything from early diagnostics to drug discovery. The best part - they are all under $10bn in marketcap - there is still time to get in early.

Return On Capital Employed (ROCE): What Is It?

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 Nankai Chemical CompanyLimited:

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

0.091 = JP¥1.2b ÷ (JP¥23b - JP¥8.9b) (Based on the trailing twelve months to December 2024).

Therefore, Nankai Chemical CompanyLimited has an ROCE of 9.1%. On its own that's a low return, but compared to the average of 7.2% generated by the Chemicals industry, it's much better.

View our latest analysis for Nankai Chemical CompanyLimited

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

What Can We Tell From Nankai Chemical CompanyLimited's ROCE Trend?

The returns on capital haven't changed much for Nankai Chemical CompanyLimited in recent years. The company has consistently earned 9.1% for the last three years, and the capital employed within the business has risen 60% in that time. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

The Bottom Line On Nankai Chemical CompanyLimited's ROCE

In summary, Nankai Chemical CompanyLimited has simply been reinvesting capital and generating the same low rate of return as before. And in the last year, the stock has given away 39% 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.

Nankai Chemical CompanyLimited does come with some risks though, we found 4 warning signs in our investment analysis, and 1 of those shouldn't be ignored...

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.

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

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.