Di-Nikko Engineering (TYO:6635) Might Have The Makings Of A Multi-Bagger

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So when we looked at Di-Nikko Engineering (TYO:6635) and its trend of ROCE, we really liked what we saw.

Return On Capital Employed (ROCE): What is it?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Di-Nikko Engineering, this is the formula:

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

0.022 = JP¥206m ÷ (JP¥20b - JP¥10b) (Based on the trailing twelve months to December 2020).

So, Di-Nikko Engineering has an ROCE of 2.2%. Ultimately, that's a low return and it under-performs the Electronic industry average of 7.3%.

See our latest analysis for Di-Nikko Engineering

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

So How Is Di-Nikko Engineering's ROCE Trending?

Di-Nikko Engineering has broken into the black (profitability) and we're sure it's a sight for sore eyes. The company was generating losses five years ago, but has managed to turn it around and as we saw earlier is now earning 2.2%, which is always encouraging. While returns have increased, the amount of capital employed by Di-Nikko Engineering has remained flat over the period. So while we're happy that the business is more efficient, just keep in mind that could mean that going forward the business is lacking areas to invest internally for growth. Because in the end, a business can only get so efficient.

On a side note, Di-Nikko Engineering's current liabilities are still rather high at 53% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Key Takeaway

To bring it all together, Di-Nikko Engineering has done well to increase the returns it's generating from its capital employed. Since the stock has returned a solid 82% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. In light of that, we think it's worth looking further into this stock because if Di-Nikko Engineering can keep these trends up, it could have a bright future ahead.

Di-Nikko Engineering does have some risks, we noticed 5 warning signs (and 1 which is a bit unpleasant) we think you should know about.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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This article by Simply Wall St is general in nature. 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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