Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. Having said that, from a first glance at Daiwa Computer (TYO:3816) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
What is Return On Capital Employed (ROCE)?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Daiwa Computer:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.10 = JP¥439m ÷ (JP¥4.9b - JP¥512m) (Based on the trailing twelve months to January 2021).
Thus, Daiwa Computer has an ROCE of 10.0%. Ultimately, that's a low return and it under-performs the Software industry average of 15%.
See our latest analysis for Daiwa Computer
Historical performance is a great place to start when researching a stock so above you can see the gauge for Daiwa Computer's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Daiwa Computer, check out these free graphs here.
What Does the ROCE Trend For Daiwa Computer Tell Us?
In terms of Daiwa Computer's historical ROCE trend, it doesn't exactly demand attention. The company has employed 38% more capital in the last five years, and the returns on that capital have remained stable at 10.0%. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.
The Bottom Line
Long story short, while Daiwa Computer has been reinvesting its capital, the returns that it's generating haven't increased. Although the market must be expecting these trends to improve because the stock has gained 41% over the last five years. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.
If you want to continue researching Daiwa Computer, you might be interested to know about the 1 warning sign that our analysis has discovered.
While Daiwa Computer 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. 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:3816
Daiwa Computer
Engages in the software development and service integration businesses in Japan and internationally.
Excellent balance sheet, good value and pays a dividend.
