The Return Trends At Nippon Steel (TSE:5401) Look Promising

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. So on that note, Nippon Steel (TSE:5401) looks quite promising in regards to its trends of return on capital.

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What Is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Nippon Steel, this is the formula:

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

0.07 = JP¥592b ÷ (JP¥11t - JP¥2.5t) (Based on the trailing twelve months to December 2024).

Thus, Nippon Steel has an ROCE of 7.0%. Even though it's in line with the industry average of 6.5%, it's still a low return by itself.

View our latest analysis for Nippon Steel

Above you can see how the current ROCE for Nippon Steel compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Nippon Steel .

What Can We Tell From Nippon Steel's ROCE Trend?

We're delighted to see that Nippon Steel is reaping rewards from its investments and is now generating some pre-tax profits. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 7.0% on its capital. And unsurprisingly, like most companies trying to break into the black, Nippon Steel is utilizing 49% more capital than it was five years ago. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

The Bottom Line On Nippon Steel's ROCE

In summary, it's great to see that Nippon Steel has managed to break into profitability and is continuing to reinvest in its business. Since the stock has returned a staggering 374% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it's worth looking further into this stock because if Nippon Steel can keep these trends up, it could have a bright future ahead.

If you want to continue researching Nippon Steel, you might be interested to know about the 1 warning sign that our analysis has discovered.

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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.