Returns On Capital Signal Difficult Times Ahead For Nippon Signal (TSE:6741)

When we're researching a company, it's sometimes hard to find the warning signs, but there are some financial metrics that can help spot trouble early. A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. So after we looked into Nippon Signal (TSE:6741), the trends above didn't look too great.

Our free stock report includes 1 warning sign investors should be aware of before investing in Nippon Signal. Read for free now.

Return On Capital Employed (ROCE): What Is It?

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

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

0.073 = JP¥7.8b ÷ (JP¥163b - JP¥56b) (Based on the trailing twelve months to December 2024).

Thus, Nippon Signal has an ROCE of 7.3%. On its own, that's a low figure but it's around the 8.9% average generated by the Electronic industry.

View our latest analysis for Nippon Signal

Historical performance is a great place to start when researching a stock so above you can see the gauge for Nippon Signal's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Nippon Signal.

The Trend Of ROCE

There is reason to be cautious about Nippon Signal, given the returns are trending downwards. About five years ago, returns on capital were 9.9%, however they're now substantially lower than that as we saw above. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Nippon Signal becoming one if things continue as they have.

Our Take On Nippon Signal's ROCE

In summary, it's unfortunate that Nippon Signal is generating lower returns from the same amount of capital. In spite of that, the stock has delivered a 10% return to shareholders who held over the last five years. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

On a final note, we've found 1 warning sign for Nippon Signal that we think you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.