Nippon Avionics (TSE:6946) Shareholders Will Want The ROCE Trajectory To Continue

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So when we looked at Nippon Avionics (TSE:6946) and its trend of ROCE, we really liked what we saw.

Understanding 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 Nippon Avionics is:

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

0.12 = JP¥2.2b ÷ (JP¥27b - JP¥8.0b) (Based on the trailing twelve months to June 2024).

Thus, Nippon Avionics has an ROCE of 12%. On its own, that's a standard return, however it's much better than the 9.5% generated by the Electronic industry.

View our latest analysis for Nippon Avionics

Above you can see how the current ROCE for Nippon Avionics compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Nippon Avionics .

The Trend Of ROCE

Nippon Avionics has not disappointed with their ROCE growth. The figures show that over the last five years, ROCE has grown 833% 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. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.

What We Can Learn From Nippon Avionics' ROCE

To sum it up, Nippon Avionics is collecting higher returns from the same amount of capital, and that's impressive. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. In light of that, we think it's worth looking further into this stock because if Nippon Avionics can keep these trends up, it could have a bright future ahead.

Nippon Avionics does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is potentially serious...

While Nippon Avionics 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. 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.