The Returns On Capital At Nagoya Railroad (TSE:9048) Don't Inspire Confidence

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding 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. In light of that, when we looked at Nagoya Railroad (TSE:9048) and its ROCE trend, we weren't exactly thrilled.

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

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)

0.04 = JP¥44b ÷ (JP¥1.4t - JP¥283b) (Based on the trailing twelve months to December 2024).

Therefore, Nagoya Railroad has an ROCE of 4.0%. In absolute terms, that's a low return and it also under-performs the Transportation industry average of 5.1%.

See 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.

What The Trend Of ROCE Can Tell Us

In terms of Nagoya Railroad's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 4.0% from 5.8% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

What We Can Learn From Nagoya Railroad's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Nagoya Railroad is reinvesting for growth and has higher sales as a result. And there could be an opportunity here if other metrics look good too, because the stock has declined 39% in the last five years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

Nagoya Railroad does come with some risks though, we found 3 warning signs in our investment analysis, and 2 of those make us uncomfortable...

While Nagoya Railroad 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.