What Do The Returns At D. I. System (TYO:4421) Mean Going Forward?

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Speaking of which, we noticed some great changes in D. I. System's (TYO:4421) returns on capital, so let's have a look.

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. To calculate this metric for D. I. System, this is the formula:

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

0.097 = JP¥107m ÷ (JP¥1.8b - JP¥658m) (Based on the trailing twelve months to September 2020).

Therefore, D. I. System has an ROCE of 9.7%. Ultimately, that's a low return and it under-performs the IT industry average of 15%.

Check out our latest analysis for D. I. System

In the above chart we have measured D. I. System's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering D. I. System here for free.

How Are Returns Trending?

While in absolute terms it isn't a high ROCE, it's promising to see that it has been moving in the right direction. Over the last four years, returns on capital employed have risen substantially to 9.7%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 173%. 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 another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 37%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance.

Our Take On D. I. System's ROCE

All in all, it's terrific to see that D. I. System is reaping the rewards from prior investments and is growing its capital base. And with a respectable 34% awarded to those who held the stock over the last year, you could argue that these developments are starting to get the attention they deserve. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

If you want to continue researching D. I. System, you might be interested to know about the 3 warning signs that our analysis has discovered.

While D. I. System 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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