What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. Having said that, from a first glance at DAIWA TSUSHIN (TSE:7116) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
What Is 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. The formula for this calculation on DAIWA TSUSHIN is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.11 = JP¥350m ÷ (JP¥4.0b - JP¥676m) (Based on the trailing twelve months to September 2024).
Thus, DAIWA TSUSHIN has an ROCE of 11%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Electronic industry average of 9.1%.
View our latest analysis for DAIWA TSUSHIN
Historical performance is a great place to start when researching a stock so above you can see the gauge for DAIWA TSUSHIN's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of DAIWA TSUSHIN.
What The Trend Of ROCE Can Tell Us
In terms of DAIWA TSUSHIN's historical ROCE movements, the trend isn't fantastic. Over the last three years, returns on capital have decreased to 11% from 50% three years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.
In Conclusion...
In summary, DAIWA TSUSHIN is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Additionally, the stock's total return to shareholders over the last year has been flat, which isn't too surprising. Therefore based on the analysis done in this article, we don't think DAIWA TSUSHIN has the makings of a multi-bagger.
One more thing: We've identified 3 warning signs with DAIWA TSUSHIN (at least 1 which is significant) , and understanding them would certainly be useful.
While DAIWA TSUSHIN 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.