What Do The Returns On Capital At DAIEISANGYOLtd (FKSE:2974) Tell Us?

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after briefly looking over the numbers, we don't think DAIEISANGYOLtd (FKSE:2974) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Return On Capital Employed (ROCE): What is it?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on DAIEISANGYOLtd is:

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

0.10 = JP¥1.2b ÷ (JP¥32b - JP¥21b) (Based on the trailing twelve months to September 2020).

Therefore, DAIEISANGYOLtd has an ROCE of 10%. In absolute terms, that's a satisfactory return, but compared to the Consumer Durables industry average of 8.0% it's much better.

Check out our latest analysis for DAIEISANGYOLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for DAIEISANGYOLtd's ROCE against it's prior returns. If you're interested in investigating DAIEISANGYOLtd's past further, check out this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

Things have been pretty stable at DAIEISANGYOLtd, with its capital employed and returns on that capital staying somewhat the same for the last three years. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. With that in mind, unless investment picks up again in the future, we wouldn't expect DAIEISANGYOLtd to be a multi-bagger going forward.

Another thing to note, DAIEISANGYOLtd has a high ratio of current liabilities to total assets of 64%. 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.

What We Can Learn From DAIEISANGYOLtd's ROCE

In a nutshell, DAIEISANGYOLtd has been trudging along with the same returns from the same amount of capital over the last three years. And investors appear hesitant that the trends will pick up because the stock has fallen 20% in the last year. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

If you'd like to know more about DAIEISANGYOLtd, we've spotted 6 warning signs, and 3 of them shouldn't be ignored.

While DAIEISANGYOLtd 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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