Will Naigai Tec (TYO:3374) Multiply In Value Going Forward?

What are the early trends we should look for to identify a stock that could multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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. However, after investigating Naigai Tec (TYO:3374), we don't think it's current trends fit the mold of a multi-bagger.

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. The formula for this calculation on Naigai Tec is:

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

0.087 = JP¥886m ÷ (JP¥18b - JP¥7.7b) (Based on the trailing twelve months to December 2020).

So, Naigai Tec has an ROCE of 8.7%. In absolute terms, that's a low return but it's around the Semiconductor industry average of 9.8%.

See our latest analysis for Naigai Tec

Historical performance is a great place to start when researching a stock so above you can see the gauge for Naigai Tec's ROCE against it's prior returns. If you'd like to look at how Naigai Tec has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

Unfortunately, the trend isn't great with ROCE falling from 14% five years ago, while capital employed has grown 135%. That being said, Naigai Tec raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. Naigai Tec probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.

On a related note, Naigai Tec has decreased its current liabilities to 43% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE. Keep in mind 43% is still pretty high, so those risks are still somewhat prevalent.

The Bottom Line

In summary, despite lower returns in the short term, we're encouraged to see that Naigai Tec is reinvesting for growth and has higher sales as a result. And long term investors must be optimistic going forward because the stock has returned a huge 491% to shareholders in the last five years. So should these growth trends continue, we'd be optimistic on the stock going forward.

Naigai Tec does have some risks, we noticed 4 warning signs (and 1 which is significant) we think you should know about.

While Naigai Tec 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. 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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