Returns On Capital Signal Tricky Times Ahead For DreambedLtd (TSE:7791)

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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 DreambedLtd (TSE:7791) 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?

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 DreambedLtd:

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

0.029 = JP¥191m ÷ (JP¥11b - JP¥4.2b) (Based on the trailing twelve months to March 2024).

Therefore, DreambedLtd has an ROCE of 2.9%. Ultimately, that's a low return and it under-performs the Consumer Durables industry average of 6.6%.

View our latest analysis for DreambedLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for DreambedLtd's ROCE against it's prior returns. If you'd like to look at how DreambedLtd has performed in the past in other metrics, you can view this free graph of DreambedLtd's past earnings, revenue and cash flow.

How Are Returns Trending?

On the surface, the trend of ROCE at DreambedLtd doesn't inspire confidence. Over the last five years, returns on capital have decreased to 2.9% from 14% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

The Key Takeaway

To conclude, we've found that DreambedLtd is reinvesting in the business, but returns have been falling. And in the last three years, the stock has given away 31% so the market doesn't look too hopeful on these trends strengthening any time soon. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

One more thing to note, we've identified 5 warning signs with DreambedLtd and understanding these should be part of your investment process.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com