If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. In light of that, when we looked at DAIHEN (TSE:6622) and its ROCE trend, we weren't exactly thrilled.
What Is 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 DAIHEN, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.075 = JP¥13b ÷ (JP¥246b - JP¥72b) (Based on the trailing twelve months to December 2023).
So, DAIHEN has an ROCE of 7.5%. On its own, that's a low figure but it's around the 8.5% average generated by the Electrical industry.
See our latest analysis for DAIHEN
Above you can see how the current ROCE for DAIHEN compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering DAIHEN for free.
How Are Returns Trending?
There are better returns on capital out there than what we're seeing at DAIHEN. The company has consistently earned 7.5% for the last five years, and the capital employed within the business has risen 62% 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.
The Bottom Line
In conclusion, DAIHEN has been investing more capital into the business, but returns on that capital haven't increased. Yet to long term shareholders the stock has gifted them an incredible 257% return in the last five years, so the market appears to be rosy about its future. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.
If you want to continue researching DAIHEN, you might be interested to know about the 2 warning signs that our analysis has discovered.
While DAIHEN 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.
About TSE:6622
DAIHEN
Manufactures and sells transformers, welding machines, and industrial and clean transport robots.
Very undervalued established dividend payer.
