Capital Allocation Trends At NTT DATA Group (TSE:9613) Aren't Ideal

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at NTT DATA Group (TSE:9613) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on NTT DATA Group is:

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

0.061 = JP¥271b ÷ (JP¥6.7t - JP¥2.2t) (Based on the trailing twelve months to December 2023).

So, NTT DATA Group has an ROCE of 6.1%. Ultimately, that's a low return and it under-performs the IT industry average of 16%.

Check out our latest analysis for NTT DATA Group

In the above chart we have measured NTT DATA Group's 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 NTT DATA Group .

How Are Returns Trending?

When we looked at the ROCE trend at NTT DATA Group, we didn't gain much confidence. To be more specific, ROCE has fallen from 8.1% over the last five years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

The Bottom Line On NTT DATA Group's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that NTT DATA Group is reinvesting for growth and has higher sales as a result. Furthermore the stock has climbed 99% over the last five years, it would appear that investors are upbeat about the future. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

On a final note, we've found 2 warning signs for NTT DATA Group that we think you should be aware of.

While NTT DATA Group 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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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.