Be Wary Of NF Holdings (TSE:6864) And Its Returns On Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating NF Holdings (TSE:6864), we don't think it's current trends fit the mold of a multi-bagger.

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 NF Holdings is:

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

0.022 = JP¥323m ÷ (JP¥18b - JP¥3.3b) (Based on the trailing twelve months to December 2024).

Thus, NF Holdings has an ROCE of 2.2%. Ultimately, that's a low return and it under-performs the Electronic industry average of 9.0%.

See our latest analysis for NF Holdings

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

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at NF Holdings doesn't inspire confidence. Around five years ago the returns on capital were 12%, but since then they've fallen to 2.2%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

The Key Takeaway

In summary, we're somewhat concerned by NF Holdings' diminishing returns on increasing amounts of capital. Despite the concerning underlying trends, the stock has actually gained 8.5% over the last five years, so it might be that the investors are expecting the trends to reverse. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

NF Holdings does have some risks, we noticed 5 warning signs (and 2 which make us uncomfortable) we think you should know about.

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. 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.