Investors Could Be Concerned With Nippon Kayaku's (TSE:4272) Returns On Capital

What financial metrics can indicate to us that a company is maturing or even in decline? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. So after we looked into Nippon Kayaku (TSE:4272), the trends above didn't look too great.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Nippon Kayaku is:

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

0.023 = JP¥6.6b ÷ (JP¥351b - JP¥64b) (Based on the trailing twelve months to December 2023).

Therefore, Nippon Kayaku has an ROCE of 2.3%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 6.7%.

Check out our latest analysis for Nippon Kayaku

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

The Trend Of ROCE

There is reason to be cautious about Nippon Kayaku, given the returns are trending downwards. To be more specific, the ROCE was 7.8% five years ago, but since then it has dropped noticeably. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Nippon Kayaku becoming one if things continue as they have.

Our Take On Nippon Kayaku's ROCE

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. Investors must expect better things on the horizon though because the stock has risen 13% in the last five years. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

Nippon Kayaku does come with some risks though, we found 4 warning signs in our investment analysis, and 2 of those are significant...

While Nippon Kayaku 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. 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.