Nagoya Railroad (TSE:9048) Could Be Struggling To Allocate Capital

When researching a stock for investment, what can tell us that the company is in decline? When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. On that note, looking into Nagoya Railroad (TSE:9048), we weren't too upbeat about how things were going.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Nagoya Railroad, this is the formula:

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

0.037 = JP¥39b ÷ (JP¥1.4t - JP¥308b) (Based on the trailing twelve months to June 2024).

Therefore, Nagoya Railroad has an ROCE of 3.7%. In absolute terms, that's a low return and it also under-performs the Transportation industry average of 5.2%.

View our latest analysis for Nagoya Railroad

In the above chart we have measured Nagoya 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 Nagoya Railroad for free.

The Trend Of ROCE

We are a bit worried about the trend of returns on capital at Nagoya Railroad. Unfortunately the returns on capital have diminished from the 5.7% that they were earning five years ago. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. If these trends continue, we wouldn't expect Nagoya Railroad to turn into a multi-bagger.

What We Can Learn From Nagoya Railroad's ROCE

In summary, it's unfortunate that Nagoya Railroad is generating lower returns from the same amount of capital. It should come as no surprise then that the stock has fallen 48% over the last five years, so it looks like investors are recognizing these changes. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

One more thing to note, we've identified 1 warning sign with Nagoya Railroad and understanding it should be part of your investment process.

While Nagoya Railroad 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.