The Returns On Capital At DEPPON LOGISTICS (SHSE:603056) Don't Inspire Confidence

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. 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 DEPPON LOGISTICS (SHSE:603056) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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. The formula for this calculation on DEPPON LOGISTICS is:

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

0.07 = CN¥684m ÷ (CN¥17b - CN¥6.9b) (Based on the trailing twelve months to June 2024).

So, DEPPON LOGISTICS has an ROCE of 7.0%. Even though it's in line with the industry average of 7.0%, it's still a low return by itself.

See our latest analysis for DEPPON LOGISTICS

Above you can see how the current ROCE for DEPPON LOGISTICS compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for DEPPON LOGISTICS .

The Trend Of ROCE

On the surface, the trend of ROCE at DEPPON LOGISTICS doesn't inspire confidence. Around five years ago the returns on capital were 11%, but since then they've fallen to 7.0%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

On a separate but related note, it's important to know that DEPPON LOGISTICS has a current liabilities to total assets ratio of 41%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

What We Can Learn From DEPPON LOGISTICS' ROCE

In summary, despite lower returns in the short term, we're encouraged to see that DEPPON LOGISTICS is reinvesting for growth and has higher sales as a result. In light of this, the stock has only gained 11% over the last five years. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.

On a separate note, we've found 1 warning sign for DEPPON LOGISTICS you'll probably want to know about.

While DEPPON LOGISTICS 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.