Slowing Rates Of Return At Nankai Electric Railway (TSE:9044) Leave Little Room For Excitement

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Having said that, from a first glance at Nankai Electric Railway (TSE:9044) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from 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)

0.046 = JP¥35b ÷ (JP¥925b - JP¥163b) (Based on the trailing twelve months to September 2024).

So, Nankai Electric Railway has an ROCE of 4.6%. On its own that's a low return on capital but it's in line with the industry's average returns of 5.2%.

View our latest analysis for Nankai Electric Railway

In the above chart we have measured Nankai Electric Railway's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Nankai Electric Railway .

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. So unless we see a substantial change at Nankai Electric Railway in terms of ROCE and additional investments being made, we wouldn't hold our breath on it being a multi-bagger.

What We Can Learn From Nankai Electric Railway's ROCE

In a nutshell, Nankai Electric Railway has been trudging along with the same returns from the same amount of capital over the last five years. And in the last five years, the stock has given away 15% 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.

Nankai Electric Railway does have some risks though, and we've spotted 2 warning signs for Nankai Electric Railway that you might be interested in.

While Nankai Electric Railway may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.