Here’s What’s Happening With Returns At NJ Holdings (TYO:9421)

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, we've noticed some promising trends at NJ Holdings (TYO:9421) so let's look a bit deeper.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on NJ Holdings is:

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

0.049 = JP¥213m ÷ (JP¥6.3b - JP¥1.9b) (Based on the trailing twelve months to June 2020).

So, NJ Holdings has an ROCE of 4.9%. Ultimately, that's a low return and it under-performs the Electronic industry average of 7.0%.

See our latest analysis for NJ Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for NJ Holdings' ROCE against it's prior returns. If you're interested in investigating NJ Holdings' past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For NJ Holdings Tell Us?

Shareholders will be relieved that NJ Holdings has broken into profitability. While the business was unprofitable in the past, it's now turned things around and is earning 4.9% on its capital. While returns have increased, the amount of capital employed by NJ Holdings has remained flat over the period. That being said, while an increase in efficiency is no doubt appealing, it'd be helpful to know if the company does have any investment plans going forward. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.

The Bottom Line

To bring it all together, NJ Holdings has done well to increase the returns it's generating from its capital employed. Since the total return from the stock has been almost flat over the last five years, there might be an opportunity here if the valuation looks good. With that in mind, we believe the promising trends warrant this stock for further investigation.

If you'd like to know more about NJ Holdings, we've spotted 6 warning signs, and 1 of them makes us a bit uncomfortable.

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. 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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