Nihon Falcom (TSE:3723) May Have Issues Allocating Its Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after investigating Nihon Falcom (TSE:3723), we don't think it's current trends fit the mold of a multi-bagger.

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Return On Capital Employed (ROCE): What Is It?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Nihon Falcom:

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

0.099 = JP¥1.0b ÷ (JP¥10b - JP¥272m) (Based on the trailing twelve months to June 2025).

Thus, Nihon Falcom has an ROCE of 9.9%. On its own that's a low return on capital but it's in line with the industry's average returns of 10%.

View our latest analysis for Nihon Falcom

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 want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Nihon Falcom.

What Does the ROCE Trend For Nihon Falcom Tell Us?

When we looked at the ROCE trend at Nihon Falcom, we didn't gain much confidence. Around five years ago the returns on capital were 16%, but since then they've fallen to 9.9%. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

The Bottom Line On Nihon Falcom's ROCE

To conclude, we've found that Nihon Falcom is reinvesting in the business, but returns have been falling. And investors may be recognizing these trends since the stock has only returned a total of 18% to shareholders over the last five years. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

If you'd like to know more about Nihon Falcom, we've spotted 2 warning signs, and 1 of them is a bit unpleasant.

While Nihon Falcom 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.