There's Been No Shortage Of Growth Recently For Systems Design's (TSE:3766) Returns On Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at Systems Design (TSE:3766) and its trend of ROCE, we really liked what we saw.

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 Systems Design, this is the formula:

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

0.10 = JP¥524m ÷ (JP¥6.3b - JP¥1.3b) (Based on the trailing twelve months to March 2024).

Therefore, Systems Design has an ROCE of 10%. In isolation, that's a pretty standard return but against the IT industry average of 16%, it's not as good.

View our latest analysis for Systems Design

Historical performance is a great place to start when researching a stock so above you can see the gauge for Systems Design's ROCE against it's prior returns. If you'd like to look at how Systems Design has performed in the past in other metrics, you can view this free graph of Systems Design's past earnings, revenue and cash flow.

The Trend Of ROCE

Systems Design has not disappointed with their ROCE growth. Looking at the data, we can see that even though capital employed in the business has remained relatively flat, the ROCE generated has risen by 1,065% over the last five years. 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. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.

The Bottom Line

As discussed above, Systems Design appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. And with a respectable 75% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. In light of that, we think it's worth looking further into this stock because if Systems Design can keep these trends up, it could have a bright future ahead.

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

While Systems Design 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. 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.

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