If you're looking for a multi-bagger, there's a few things to keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding 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 investigating Denka (TSE:4061), we don't think it's current trends fit the mold of a multi-bagger.
Understanding 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. The formula for this calculation on Denka is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.027 = JP¥12b ÷ (JP¥650b - JP¥203b) (Based on the trailing twelve months to September 2024).
Thus, Denka has an ROCE of 2.7%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 7.2%.
Check out our latest analysis for Denka
Above you can see how the current ROCE for Denka compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Denka .
What Does the ROCE Trend For Denka Tell Us?
On the surface, the trend of ROCE at Denka doesn't inspire confidence. Around five years ago the returns on capital were 11%, but since then they've fallen to 2.7%. 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.
What We Can Learn From Denka's ROCE
In summary, Denka is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And in the last five years, the stock has given away 16% 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.
On a final note, we found 3 warning signs for Denka (1 can't be ignored) you should be aware of.
While Denka 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.
About TSE:4061
Denka
Manufactures and sells organic and inorganic materials to electronic materials and pharmaceuticals in Japan and internationally.
Average dividend payer with moderate growth potential.
