Returns At Daiichikosho (TSE:7458) Appear To Be Weighed Down

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. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Daiichikosho (TSE:7458) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding 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 Daiichikosho is:

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

0.13 = JP¥18b ÷ (JP¥177b - JP¥34b) (Based on the trailing twelve months to December 2023).

Therefore, Daiichikosho has an ROCE of 13%. On its own, that's a standard return, however it's much better than the 10% generated by the Entertainment industry.

View our latest analysis for Daiichikosho

In the above chart we have measured Daiichikosho's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Daiichikosho .

What The Trend Of ROCE Can Tell Us

Over the past five years, Daiichikosho's ROCE and capital employed have both remained mostly flat. 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 Daiichikosho to be a multi-bagger going forward.

What We Can Learn From Daiichikosho's ROCE

In a nutshell, Daiichikosho has been trudging along with the same returns from the same amount of capital over the last five years. And in the last five years, the stock has given away 23% 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.

Daiichikosho could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation for 7458 on our platform quite valuable.

While Daiichikosho 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.