Digital Media Professionals' (TSE:3652) Returns On Capital Are Heading Higher

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. With that in mind, we've noticed some promising trends at Digital Media Professionals (TSE:3652) so let's look a bit deeper.

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. The formula for this calculation on Digital Media Professionals is:

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

0.095 = JP¥329m ÷ (JP¥3.9b - JP¥443m) (Based on the trailing twelve months to March 2024).

Therefore, Digital Media Professionals has an ROCE of 9.5%. In absolute terms, that's a low return and it also under-performs the Semiconductor industry average of 12%.

View our latest analysis for Digital Media Professionals

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Digital Media Professionals has performed in the past in other metrics, you can view this free graph of Digital Media Professionals' past earnings, revenue and cash flow.

What Does the ROCE Trend For Digital Media Professionals Tell Us?

Shareholders will be relieved that Digital Media Professionals has broken into profitability. While the business was unprofitable in the past, it's now turned things around and is earning 9.5% on its capital. While returns have increased, the amount of capital employed by Digital Media Professionals has remained flat over the period. That being said, while an increase in efficiency is no doubt appealing, it'd be helpful to know if the company does have any investment plans going forward. So if you're looking for high growth, you'll want to see a business's capital employed also increasing.

In Conclusion...

In summary, we're delighted to see that Digital Media Professionals has been able to increase efficiencies and earn higher rates of return on the same amount of capital. Astute investors may have an opportunity here because the stock has declined 45% in the last five years. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

One more thing, we've spotted 1 warning sign facing Digital Media Professionals that you might find interesting.

While Digital Media Professionals 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.

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