Nippon Soda (TSE:4041) Might Have The Makings Of A Multi-Bagger

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, 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. So when we looked at Nippon Soda (TSE:4041) and its trend of ROCE, we really liked what we saw.

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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 Nippon Soda:

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

0.066 = JP¥15b ÷ (JP¥294b - JP¥65b) (Based on the trailing twelve months to December 2024).

Thus, Nippon Soda has an ROCE of 6.6%. Even though it's in line with the industry average of 7.3%, it's still a low return by itself.

See our latest analysis for Nippon Soda

In the above chart we have measured Nippon Soda's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Nippon Soda .

What Does the ROCE Trend For Nippon Soda Tell Us?

We're glad to see that ROCE is heading in the right direction, even if it is still low at the moment. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 6.6%. Basically the business is earning more per dollar of capital invested and in addition to that, 35% more capital is being employed now too. So we're very much inspired by what we're seeing at Nippon Soda thanks to its ability to profitably reinvest capital.

In Conclusion...

To sum it up, Nippon Soda has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And a remarkable 143% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if Nippon Soda can keep these trends up, it could have a bright future ahead.

If you want to know some of the risks facing Nippon Soda we've found 2 warning signs (1 is potentially serious!) that you should be aware of before investing here.

While Nippon Soda isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.