Returns At Nippon Shokubai (TSE:4114) Appear To Be Weighed Down

Simply Wall St · 04/15 03:29

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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. However, after briefly looking over the numbers, we don't think Nippon Shokubai (TSE:4114) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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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 Nippon Shokubai, this is the formula:

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

0.039 = JP¥17b ÷ (JP¥557b - JP¥116b) (Based on the trailing twelve months to December 2024).

Thus, Nippon Shokubai has an ROCE of 3.9%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 7.2%.

See our latest analysis for Nippon Shokubai

roce
TSE:4114 Return on Capital Employed April 15th 2025

In the above chart we have measured Nippon Shokubai's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Nippon Shokubai .

What Does the ROCE Trend For Nippon Shokubai Tell Us?

Over the past five years, Nippon Shokubai's ROCE and capital employed have both remained mostly flat. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. So unless we see a substantial change at Nippon Shokubai 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 Nippon Shokubai's ROCE

In a nutshell, Nippon Shokubai has been trudging along with the same returns from the same amount of capital over the last five years. Since the stock has gained an impressive 56% over the last five years, investors must think there's better things to come. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

Nippon Shokubai could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation for 4114 on our platform quite valuable.

While Nippon Shokubai isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.