Why We Like The Returns At Nintendo (TSE:7974)

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, the ROCE of Nintendo (TSE:7974) looks great, so lets see what the trend can tell us.

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. The formula for this calculation on Nintendo is:

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

0.22 = JP¥558b ÷ (JP¥3.1t - JP¥530b) (Based on the trailing twelve months to December 2023).

So, Nintendo has an ROCE of 22%. That's a fantastic return and not only that, it outpaces the average of 10% earned by companies in a similar industry.

Check out our latest analysis for Nintendo

In the above chart we have measured Nintendo'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 Nintendo .

What Can We Tell From Nintendo's ROCE Trend?

Nintendo is displaying some positive trends. Over the last five years, returns on capital employed have risen substantially to 22%. Basically the business is earning more per dollar of capital invested and in addition to that, 75% more capital is being employed now too. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

The Bottom Line

To sum it up, Nintendo has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And a remarkable 135% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if Nintendo can keep these trends up, it could have a bright future ahead.

Nintendo does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those shouldn't be ignored...

High returns are a key ingredient to strong performance, so check out our free list ofstocks 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.