NS Solutions (TSE:2327) Could Be Struggling To Allocate Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. In light of that, when we looked at NS Solutions (TSE:2327) and its ROCE trend, we weren't exactly thrilled.

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. To calculate this metric for NS Solutions, this is the formula:

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

0.13 = JP¥34b ÷ (JP¥339b - JP¥67b) (Based on the trailing twelve months to December 2023).

So, NS Solutions has an ROCE of 13%. In isolation, that's a pretty standard return but against the IT industry average of 16%, it's not as good.

View our latest analysis for NS Solutions

In the above chart we have measured NS Solutions' prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for NS Solutions .

So How Is NS Solutions' ROCE Trending?

In terms of NS Solutions' historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 13% from 16% five years ago. However it looks like NS Solutions might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

In Conclusion...

Bringing it all together, while we're somewhat encouraged by NS Solutions' reinvestment in its own business, we're aware that returns are shrinking. Since the stock has gained an impressive 94% over the last five years, investors must think there's better things to come. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

NS Solutions could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation for 2327 on our platform quite valuable.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.