Investors Shouldn't Overlook The Favourable Returns On Capital At Digital Arts (TSE:2326)

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding 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. So, when we ran our eye over Digital Arts' (TSE:2326) trend of ROCE, we really liked what we saw.

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Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Digital Arts, this is the formula:

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

0.27 = JP¥4.5b ÷ (JP¥21b - JP¥4.4b) (Based on the trailing twelve months to December 2024).

Thus, Digital Arts has an ROCE of 27%. That's a fantastic return and not only that, it outpaces the average of 16% earned by companies in a similar industry.

View our latest analysis for Digital Arts

In the above chart we have measured Digital Arts' prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Digital Arts .

So How Is Digital Arts' ROCE Trending?

We'd be pretty happy with returns on capital like Digital Arts. The company has employed 102% more capital in the last five years, and the returns on that capital have remained stable at 27%. Returns like this are the envy of most businesses and given it has repeatedly reinvested at these rates, that's even better. If Digital Arts can keep this up, we'd be very optimistic about its future.

In Conclusion...

In short, we'd argue Digital Arts has the makings of a multi-bagger since its been able to compound its capital at very profitable rates of return. In light of this, the stock has only gained 15% over the last five years for shareholders who have owned the stock in this period. So to determine if Digital Arts is a multi-bagger going forward, we'd suggest digging deeper into the company's other fundamentals.

If you want to continue researching Digital Arts, you might be interested to know about the 1 warning sign that our analysis has discovered.

Digital Arts is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.