Returns On Capital At D. I. System (TYO:4421) Have Stalled

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. So, when we ran our eye over D. I. System's (TYO:4421) trend of ROCE, we liked what we saw.

What is 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. The formula for this calculation on D. I. System is:

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

0.13 = JP¥140m ÷ (JP¥1.8b - JP¥692m) (Based on the trailing twelve months to December 2020).

Thus, D. I. System has an ROCE of 13%. That's a relatively normal return on capital, and it's around the 14% generated by the IT industry.

View our latest analysis for D. I. System

Above you can see how the current ROCE for D. I. System compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for D. I. System.

The Trend Of ROCE

While the returns on capital are good, they haven't moved much. The company has consistently earned 13% for the last four years, and the capital employed within the business has risen 177% in that time. 13% is a pretty standard return, and it provides some comfort knowing that D. I. System 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.

On a side note, D. I. System has done well to reduce current liabilities to 38% of total assets over the last four years. Effectively suppliers now fund less of the business, which can lower some elements of risk.

The Bottom Line

To sum it up, D. I. System has simply been reinvesting capital steadily, at those decent rates of return. And long term investors would be thrilled with the 111% return they've received over the last year. So even though the stock might be more "expensive" than it was before, we think the strong fundamentals warrant this stock for further research.

If you'd like to know about the risks facing D. I. System, we've discovered 2 warning signs that you should be aware of.

While D. I. System 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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