We're Watching These Trends At DYNAM JAPAN HOLDINGS (HKG:6889)

What are the early trends we should look for to identify a stock that could multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at DYNAM JAPAN HOLDINGS (HKG:6889) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding Return On Capital Employed (ROCE)

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 DYNAM JAPAN HOLDINGS, this is the formula:

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

0.032 = JP¥7.5b ÷ (JP¥296b - JP¥63b) (Based on the trailing twelve months to September 2020).

So, DYNAM JAPAN HOLDINGS has an ROCE of 3.2%. On its own, that's a low figure but it's around the 3.5% average generated by the Hospitality industry.

See our latest analysis for DYNAM JAPAN HOLDINGS

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 want to delve into the historical earnings, revenue and cash flow of DYNAM JAPAN HOLDINGS, check out these free graphs here.

The Trend Of ROCE

In terms of DYNAM JAPAN HOLDINGS' historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 3.2% from 7.8% five years ago. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

What We Can Learn From DYNAM JAPAN HOLDINGS' ROCE

We're a bit apprehensive about DYNAM JAPAN HOLDINGS because despite more capital being deployed in the business, returns on that capital and sales have both fallen. In spite of that, the stock has delivered a 8.7% return to shareholders who held over the last five years. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

DYNAM JAPAN HOLDINGS does have some risks though, and we've spotted 3 warning signs for DYNAM JAPAN HOLDINGS that you might be interested in.

While DYNAM JAPAN HOLDINGS 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. 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.
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