Nishi-Nippon Railroad (TSE:9031) Has Some Way To Go To Become A Multi-Bagger

There are a few key trends to look for if we want to identify the next multi-bagger. 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. However, after investigating Nishi-Nippon Railroad (TSE:9031), we don't think it's current trends fit the mold of a multi-bagger.

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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 Nishi-Nippon Railroad is:

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

0.048 = JP¥29b ÷ (JP¥763b - JP¥155b) (Based on the trailing twelve months to December 2024).

Therefore, Nishi-Nippon Railroad has an ROCE of 4.8%. Even though it's in line with the industry average of 5.1%, it's still a low return by itself.

View our latest analysis for Nishi-Nippon Railroad

In the above chart we have measured Nishi-Nippon Railroad'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 Nishi-Nippon Railroad for free.

What Does the ROCE Trend For Nishi-Nippon Railroad Tell Us?

There are better returns on capital out there than what we're seeing at Nishi-Nippon Railroad. Over the past five years, ROCE has remained relatively flat at around 4.8% and the business has deployed 33% more capital into its operations. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

In Conclusion...

In conclusion, Nishi-Nippon Railroad has been investing more capital into the business, but returns on that capital haven't increased. Additionally, the stock's total return to shareholders over the last five years has been flat, which isn't too surprising. Therefore based on the analysis done in this article, we don't think Nishi-Nippon Railroad has the makings of a multi-bagger.

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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.