Will Nippon Ichi Software (TYO:3851) Become A Multi-Bagger?

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding 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, the ROCE of Nippon Ichi Software (TYO:3851) looks great, so lets see what the trend can tell us.

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 Ichi Software is:

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

0.20 = JP¥854m ÷ (JP¥5.5b - JP¥1.3b) (Based on the trailing twelve months to September 2020).

Thus, Nippon Ichi Software has an ROCE of 20%. In absolute terms that's a great return and it's even better than the Entertainment industry average of 13%.

Check out our latest analysis for Nippon Ichi Software

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Nippon Ichi Software has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Nippon Ichi Software Tell Us?

The trends we've noticed at Nippon Ichi Software are quite reassuring. Over the last five years, returns on capital employed have risen substantially to 20%. The amount of capital employed has increased too, by 89%. So we're very much inspired by what we're seeing at Nippon Ichi Software thanks to its ability to profitably reinvest capital.

What We Can Learn From Nippon Ichi Software's ROCE

All in all, it's terrific to see that Nippon Ichi Software is reaping the rewards from prior investments and is growing its capital base. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. Therefore, we think it would be worth your time to check if these trends are going to continue.

On a final note, we've found 2 warning signs for Nippon Ichi Software that we think you should be aware of.

Nippon Ichi Software is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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This article by Simply Wall St is general in nature. 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.
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