Returns On Capital Are Showing Encouraging Signs At Digital Media Professionals (TSE:3652)

What trends should we look for it we want to identify stocks that can multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. With that in mind, we've noticed some promising trends at Digital Media Professionals (TSE:3652) so let's look a bit deeper.

What Is 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. To calculate this metric for Digital Media Professionals, this is the formula:

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

0.10 = JP¥349m ÷ (JP¥3.9b - JP¥532m) (Based on the trailing twelve months to December 2023).

Thus, Digital Media Professionals has an ROCE of 10%. That's a relatively normal return on capital, and it's around the 12% generated by the Semiconductor industry.

Check out 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 Can We Tell From Digital Media Professionals' ROCE Trend?

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 10% 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. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.

The Key Takeaway

To sum it up, Digital Media Professionals is collecting higher returns from the same amount of capital, and that's impressive. And since the stock has fallen 20% over the last five years, there might be an opportunity here. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

Digital Media Professionals does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those doesn't sit too well with us...

While Digital Media Professionals 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.