Nitto Denko (TSE:6988) Is Experiencing Growth In Returns On Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. With that in mind, we've noticed some promising trends at Nitto Denko (TSE:6988) so let's look a bit deeper.

Understanding 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. Analysts use this formula to calculate it for Nitto Denko:

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

0.17 = JP¥180b ÷ (JP¥1.3t - JP¥224b) (Based on the trailing twelve months to September 2024).

So, Nitto Denko has an ROCE of 17%. In absolute terms, that's a satisfactory return, but compared to the Chemicals industry average of 7.1% it's much better.

Check out our latest analysis for Nitto Denko

In the above chart we have measured Nitto Denko's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Nitto Denko .

So How Is Nitto Denko's ROCE Trending?

We like the trends that we're seeing from Nitto Denko. Over the last five years, returns on capital employed have risen substantially to 17%. The amount of capital employed has increased too, by 38%. So we're very much inspired by what we're seeing at Nitto Denko thanks to its ability to profitably reinvest capital.

Our Take On Nitto Denko's ROCE

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Nitto Denko has. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

On the other side of ROCE, we have to consider valuation. That's why we have a FREE intrinsic value estimation for 6988 on our platform that is definitely worth checking out.

While Nitto Denko 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.