Returns On Capital - An Important Metric For Nippon Computer Dynamics (TYO:4783)

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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. Speaking of which, we noticed some great changes in Nippon Computer Dynamics' (TYO:4783) returns on capital, so let's have a look.

What is Return On Capital Employed (ROCE)?

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 Nippon Computer Dynamics, this is the formula:

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

0.073 = JP¥509m ÷ (JP¥11b - JP¥4.1b) (Based on the trailing twelve months to September 2020).

Thus, Nippon Computer Dynamics has an ROCE of 7.3%. Ultimately, that's a low return and it under-performs the IT industry average of 15%.

Check out our latest analysis for Nippon Computer Dynamics

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're interested in investigating Nippon Computer Dynamics' past further, check out this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

Nippon Computer Dynamics is showing promise given that its ROCE is trending up and to the right. The figures show that over the last five years, ROCE has grown 67% whilst employing roughly the same amount of capital. So it's likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn't changed considerably. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.

The Bottom Line On Nippon Computer Dynamics' ROCE

To bring it all together, Nippon Computer Dynamics has done well to increase the returns it's generating from its capital employed. Given the stock has declined 31% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. So researching this company further and determining whether or not these trends will continue seems justified.

On a separate note, we've found 2 warning signs for Nippon Computer Dynamics you'll probably want to know about.

While Nippon Computer Dynamics 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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