If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. Speaking of which, we noticed some great changes in Dawn's (TYO:2303) returns on capital, so let's have a look.
Return On Capital Employed (ROCE): What is it?
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Dawn, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.19 = JP¥344m ÷ (JP¥2.0b - JP¥122m) (Based on the trailing twelve months to February 2021).
So, Dawn has an ROCE of 19%. On its own, that's a standard return, however it's much better than the 15% generated by the Software industry.
See our latest analysis for Dawn
Historical performance is a great place to start when researching a stock so above you can see the gauge for Dawn's ROCE against it's prior returns. If you'd like to look at how Dawn has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
The Trend Of ROCE
We like the trends that we're seeing from Dawn. Over the last five years, returns on capital employed have risen substantially to 19%. The amount of capital employed has increased too, by 56%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.
In Conclusion...
To sum it up, Dawn has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Since the total return from the stock has been almost flat over the last five years, there might be an opportunity here if the valuation looks good. So researching this company further and determining whether or not these trends will continue seems justified.
One more thing to note, we've identified 1 warning sign with Dawn and understanding this should be part of your investment process.
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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About TSE:2303
Dawn
Engages in the development and maintenance of Saas based geographic information systems (GIS) in Japan.
Flawless balance sheet with solid track record.
