If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after investigating Systems Design (TYO:3766), we don't think it's current trends fit the mold of a multi-bagger.
Understanding Return On Capital Employed (ROCE)
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. Analysts use this formula to calculate it for Systems Design:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.034 = JP¥136m ÷ (JP¥5.1b - JP¥1.1b) (Based on the trailing twelve months to December 2020).
So, Systems Design has an ROCE of 3.4%. In absolute terms, that's a low return and it also under-performs the IT industry average of 14%.
See our latest analysis for Systems Design
Historical performance is a great place to start when researching a stock so above you can see the gauge for Systems Design's ROCE against it's prior returns. If you'd like to look at how Systems Design has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
So How Is Systems Design's ROCE Trending?
Things have been pretty stable at Systems Design, with its capital employed and returns on that capital staying somewhat the same for the last five years. Businesses with these traits tend to be mature and steady operations because they're past the growth phase. With that in mind, unless investment picks up again in the future, we wouldn't expect Systems Design to be a multi-bagger going forward.
The Key Takeaway
In a nutshell, Systems Design has been trudging along with the same returns from the same amount of capital over the last five years. And investors may be recognizing these trends since the stock has only returned a total of 36% to shareholders over the last five years. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.
If you'd like to know more about Systems Design, we've spotted 3 warning signs, and 1 of them is a bit unpleasant.
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:3766
Flawless balance sheet 6 star dividend payer.
