The Returns On Capital At Diamond Electric Holdings (TSE:6699) Don't Inspire Confidence

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. 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 Diamond Electric Holdings (TSE:6699) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What Is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Diamond Electric Holdings:

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

0.015 = JP¥407m ÷ (JP¥82b - JP¥54b) (Based on the trailing twelve months to December 2023).

So, Diamond Electric Holdings has an ROCE of 1.5%. Ultimately, that's a low return and it under-performs the Auto Components industry average of 7.1%.

Check out our latest analysis for Diamond Electric 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're interested in investigating Diamond Electric Holdings' past further, check out this free graph covering Diamond Electric Holdings' past earnings, revenue and cash flow.

So How Is Diamond Electric Holdings' ROCE Trending?

In terms of Diamond Electric Holdings' historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 2.8% over the last five years. 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.

On a separate but related note, it's important to know that Diamond Electric Holdings has a current liabilities to total assets ratio of 67%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Bottom Line

To conclude, we've found that Diamond Electric Holdings is reinvesting in the business, but returns have been falling. And in the last five years, the stock has given away 11% so the market doesn't look too hopeful on these trends strengthening any time soon. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

One more thing, we've spotted 1 warning sign facing Diamond Electric Holdings that you might find interesting.

While Diamond Electric Holdings 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.