Here’s What’s Happening With Returns At Nippon Kodoshi (TYO:3891)

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. With that in mind, we've noticed some promising trends at Nippon Kodoshi (TYO:3891) so let's look a bit deeper.

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. To calculate this metric for Nippon Kodoshi, this is the formula:

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

0.12 = JP¥2.2b ÷ (JP¥23b - JP¥4.3b) (Based on the trailing twelve months to December 2020).

Thus, Nippon Kodoshi has an ROCE of 12%. On its own, that's a standard return, however it's much better than the 7.0% generated by the Electronic industry.

Check out our latest analysis for Nippon Kodoshi

In the above chart we have measured Nippon Kodoshi's 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 Nippon Kodoshi here for free.

What Does the ROCE Trend For Nippon Kodoshi Tell Us?

Nippon Kodoshi's ROCE growth is quite impressive. The figures show that over the last five years, ROCE has grown 2,163% whilst employing roughly the same amount of capital. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.

Our Take On Nippon Kodoshi's ROCE

In summary, we're delighted to see that Nippon Kodoshi has been able to increase efficiencies and earn higher rates of return on the same amount of capital. Since the stock has returned a staggering 314% to shareholders over the last five years, it looks like investors are recognizing these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.

One more thing to note, we've identified 1 warning sign with Nippon Kodoshi and understanding it should be part of your investment process.

While Nippon Kodoshi 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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