Returns On Capital At Daiwa Computer (TYO:3816) Paint An Interesting Picture

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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So, when we ran our eye over Daiwa Computer's (TYO:3816) trend of ROCE, we liked what we saw.

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. To calculate this metric for Daiwa Computer, this is the formula:

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

0.10 = JP¥432m ÷ (JP¥4.8b - JP¥527m) (Based on the trailing twelve months to October 2020).

So, Daiwa Computer has an ROCE of 10%. In isolation, that's a pretty standard return but against the Software industry average of 15%, it's not as good.

See our latest analysis for Daiwa Computer

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 want to delve into the historical earnings, revenue and cash flow of Daiwa Computer, check out these free graphs here.

So How Is Daiwa Computer's ROCE Trending?

While the returns on capital are good, they haven't moved much. Over the past five years, ROCE has remained relatively flat at around 10% and the business has deployed 38% more capital into its operations. 10% is a pretty standard return, and it provides some comfort knowing that Daiwa Computer has consistently earned this amount. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.

Our Take On Daiwa Computer's ROCE

To sum it up, Daiwa Computer has simply been reinvesting capital steadily, at those decent rates of return. However, over the last five years, the stock has only delivered a 38% return to shareholders who held over that period. That's why it could be worth your time looking into this stock further to discover if it has more traits of a multi-bagger.

One more thing to note, we've identified 2 warning signs with Daiwa Computer and understanding these should be part of your investment process.

While Daiwa Computer 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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