There Are Reasons To Feel Uneasy About NTT DATA Group's (TSE:9613) Returns On Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after investigating NTT DATA Group (TSE:9613), we don't think it's current trends fit the mold of a multi-bagger.

Understanding 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 NTT DATA Group, this is the formula:

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

0.065 = JP¥310b ÷ (JP¥7.6t - JP¥2.8t) (Based on the trailing twelve months to June 2024).

So, NTT DATA Group has an ROCE of 6.5%. In absolute terms, that's a low return and it also under-performs the IT industry average of 15%.

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'd like, you can check out the forecasts from the analysts covering NTT DATA Group for free.

What Does the ROCE Trend For NTT DATA Group Tell Us?

On the surface, the trend of ROCE at NTT DATA Group doesn't inspire confidence. Over the last five years, returns on capital have decreased to 6.5% from 8.4% five years ago. 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.

Our Take 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. And the stock has done incredibly well with a 105% return over the last five years, so long term investors are no doubt ecstatic with that result. 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.

Like most companies, NTT DATA Group does come with some risks, and we've found 1 warning sign that you should be aware of.

While NTT DATA Group 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.