Stock Analysis

The Returns On Capital At NS Solutions (TSE:2327) Don't Inspire Confidence

TSE:2327
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Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Having said that, from a first glance at NS Solutions (TSE:2327) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What Is Return On Capital Employed (ROCE)?

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. The formula for this calculation on NS Solutions is:

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

0.13 = JP¥39b ÷ (JP¥400b - JP¥101b) (Based on the trailing twelve months to September 2024).

Therefore, NS Solutions has an ROCE of 13%. That's a relatively normal return on capital, and it's around the 16% generated by the IT industry.

View our latest analysis for NS Solutions

roce
TSE:2327 Return on Capital Employed November 19th 2024

In the above chart we have measured NS Solutions' prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering NS Solutions for free.

What Does the ROCE Trend For NS Solutions Tell Us?

On the surface, the trend of ROCE at NS Solutions doesn't inspire confidence. To be more specific, ROCE has fallen from 17% over the last five years. 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.

Our Take On NS Solutions' ROCE

Bringing it all together, while we're somewhat encouraged by NS Solutions' reinvestment in its own business, we're aware that returns are shrinking. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 148% gain to shareholders who have held over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

If you'd like to know about the risks facing NS Solutions, we've discovered 1 warning sign that you should be aware of.

While NS Solutions 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.

Valuation is complex, but we're here to simplify it.

Discover if NS Solutions might be undervalued or overvalued with our detailed analysis, featuring fair value estimates, potential risks, dividends, insider trades, and its financial condition.

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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.