Returns On Capital At Nankai Electric Railway (TSE:9044) Have Hit The Brakes

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after investigating Nankai Electric Railway (TSE:9044), we don't think it's current trends fit the mold of a multi-bagger.

What Is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Nankai Electric Railway, this is the formula:

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

0.044 = JP¥34b ÷ (JP¥932b - JP¥161b) (Based on the trailing twelve months to June 2024).

Thus, Nankai Electric Railway has an ROCE of 4.4%. On its own, that's a low figure but it's around the 5.2% average generated by the Transportation industry.

Check out our latest analysis for Nankai Electric Railway

Above you can see how the current ROCE for Nankai Electric Railway compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Nankai Electric Railway for free.

What The Trend Of ROCE Can Tell Us

Things have been pretty stable at Nankai Electric Railway, with its capital employed and returns on that capital staying somewhat the same for the last five years. This tells us the company isn't reinvesting in itself, so it's plausible that it's past the growth phase. With that in mind, unless investment picks up again in the future, we wouldn't expect Nankai Electric Railway to be a multi-bagger going forward.

The Key Takeaway

In summary, Nankai Electric Railway isn't compounding its earnings but is generating stable returns on the same amount of capital employed. And in the last five years, the stock has given away 13% so the market doesn't look too hopeful on these trends strengthening any time soon. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

On a final note, we've found 2 warning signs for Nankai Electric Railway that we think you should be aware of.

While Nankai Electric Railway 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.