Returns On Capital At Nippon Densetsu Kogyo (TSE:1950) Have Hit The Brakes

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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 Nippon Densetsu Kogyo (TSE:1950) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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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 Densetsu Kogyo, this is the formula:

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

0.089 = JP¥20b ÷ (JP¥269b - JP¥40b) (Based on the trailing twelve months to September 2025).

So, Nippon Densetsu Kogyo has an ROCE of 8.9%. In absolute terms, that's a low return but it's around the Construction industry average of 11%.

View our latest analysis for Nippon Densetsu Kogyo

Above you can see how the current ROCE for Nippon Densetsu Kogyo compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Nippon Densetsu Kogyo .

What Can We Tell From Nippon Densetsu Kogyo's ROCE Trend?

In terms of Nippon Densetsu Kogyo's historical ROCE trend, it doesn't exactly demand attention. The company has consistently earned 8.9% for the last five years, and the capital employed within the business has risen 23% in that time. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

Our Take On Nippon Densetsu Kogyo's ROCE

As we've seen above, Nippon Densetsu Kogyo's returns on capital haven't increased but it is reinvesting in the business. Although the market must be expecting these trends to improve because the stock has gained 85% over the last five years. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

Nippon Densetsu Kogyo does have some risks though, and we've spotted 1 warning sign for Nippon Densetsu Kogyo that you might be interested in.

While Nippon Densetsu Kogyo 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.