Are Investors Concerned With What's Going On At Broadcasting System of Niigata (TYO:9408)?

If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. Having said that, after a brief look, Broadcasting System of Niigata (TYO:9408) we aren't filled with optimism, but let's investigate further.

What is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Broadcasting System of Niigata:

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

0.047 = JP¥928m ÷ (JP¥25b - JP¥4.8b) (Based on the trailing twelve months to December 2020).

Therefore, Broadcasting System of Niigata has an ROCE of 4.7%. In absolute terms, that's a low return and it also under-performs the IT industry average of 13%.

View our latest analysis for Broadcasting System of Niigata

Historical performance is a great place to start when researching a stock so above you can see the gauge for Broadcasting System of Niigata's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Broadcasting System of Niigata, check out these free graphs here.

What The Trend Of ROCE Can Tell Us

We are a bit worried about the trend of returns on capital at Broadcasting System of Niigata. About five years ago, returns on capital were 6.9%, however they're now substantially lower than that as we saw above. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Broadcasting System of Niigata becoming one if things continue as they have.

What We Can Learn From Broadcasting System of Niigata's ROCE

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. Yet despite these poor fundamentals, the stock has gained a huge 104% over the last five years, so investors appear very optimistic. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

On a final note, we found 4 warning signs for Broadcasting System of Niigata (1 is a bit concerning) you should be aware of.

While Broadcasting System of Niigata 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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