Is Nippon Primex (TYO:2795) Using Capital Effectively?

To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. Basically the company is earning less on its investments and it is also reducing its total assets. On that note, looking into Nippon Primex (TYO:2795), we weren't too upbeat about how things were going.

Return On Capital Employed (ROCE): What is it?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Nippon Primex:

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

0.051 = JP¥327m ÷ (JP¥7.8b - JP¥1.4b) (Based on the trailing twelve months to December 2020).

So, Nippon Primex has an ROCE of 5.1%. In absolute terms, that's a low return and it also under-performs the Tech industry average of 13%.

View our latest analysis for Nippon Primex

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Nippon Primex has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Nippon Primex Tell Us?

There is reason to be cautious about Nippon Primex, given the returns are trending downwards. About five years ago, returns on capital were 7.4%, however they're now substantially lower than that as we saw above. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. If these trends continue, we wouldn't expect Nippon Primex to turn into a multi-bagger.

What We Can Learn From Nippon Primex's ROCE

In summary, it's unfortunate that Nippon Primex is generating lower returns from the same amount of capital. But investors must be expecting an improvement of sorts because over the last five yearsthe stock has delivered a respectable 46% return. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

If you want to continue researching Nippon Primex, you might be interested to know about the 2 warning signs that our analysis has discovered.

While Nippon Primex 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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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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