There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. In light of that, when we looked at DMS (TYO:9782) and its ROCE trend, we weren't exactly thrilled.
What is Return On Capital Employed (ROCE)?
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 DMS is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.10 = JP¥1.4b ÷ (JP¥17b - JP¥3.3b) (Based on the trailing twelve months to September 2020).
Therefore, DMS has an ROCE of 10.0%. On its own, that's a low figure but it's around the 9.3% average generated by the Media industry.
View our latest analysis for DMS
Historical performance is a great place to start when researching a stock so above you can see the gauge for DMS' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of DMS, check out these free graphs here.
What Can We Tell From DMS' ROCE Trend?
The returns on capital haven't changed much for DMS in recent years. The company has employed 30% more capital in the last five years, and the returns on that capital have remained stable at 10.0%. 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.
What We Can Learn From DMS' ROCE
In conclusion, DMS has been investing more capital into the business, but returns on that capital haven't increased. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 105% gain to shareholders who have held over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.
On a final note, we've found 2 warning signs for DMS that we think you should be aware of.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
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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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About TSE:9782
Second-rate dividend payer very low.
