The Returns On Capital At Nippon Felt (TSE:3512) Don't Inspire Confidence

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. Having said that, from a first glance at Nippon Felt (TSE:3512) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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What Is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Nippon Felt, this is the formula:

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

0.0084 = JP¥200m ÷ (JP¥26b - JP¥2.5b) (Based on the trailing twelve months to September 2025).

So, Nippon Felt has an ROCE of 0.8%. Ultimately, that's a low return and it under-performs the Luxury industry average of 4.0%.

See our latest analysis for Nippon Felt

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Nippon Felt has performed in the past in other metrics, you can view this free graph of Nippon Felt's past earnings, revenue and cash flow.

So How Is Nippon Felt's ROCE Trending?

When we looked at the ROCE trend at Nippon Felt, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 0.8% from 1.9% five years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

Our Take On Nippon Felt's ROCE

Bringing it all together, while we're somewhat encouraged by Nippon Felt's reinvestment in its own business, we're aware that returns are shrinking. Since the stock has gained an impressive 89% over the last five years, investors must think there's better things to come. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

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

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.