Returns On Capital Are Showing Encouraging Signs At Daiko Denshi Tsushin (TSE:8023)

If you're looking for a multi-bagger, there's a few things to keep an eye out for. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So when we looked at Daiko Denshi Tsushin (TSE:8023) and its trend of ROCE, we really liked what we saw.

Return On Capital Employed (ROCE): What Is It?

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. Analysts use this formula to calculate it for Daiko Denshi Tsushin:

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

0.17 = JP¥2.9b ÷ (JP¥28b - JP¥11b) (Based on the trailing twelve months to March 2024).

Thus, Daiko Denshi Tsushin has an ROCE of 17%. In absolute terms, that's a satisfactory return, but compared to the Electronic industry average of 9.2% it's much better.

Check out our latest analysis for Daiko Denshi Tsushin

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

The Trend Of ROCE

The trends we've noticed at Daiko Denshi Tsushin are quite reassuring. The data shows that returns on capital have increased substantially over the last five years to 17%. The amount of capital employed has increased too, by 29%. So we're very much inspired by what we're seeing at Daiko Denshi Tsushin thanks to its ability to profitably reinvest capital.

Another thing to note, Daiko Denshi Tsushin has a high ratio of current liabilities to total assets of 40%. 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 Bottom Line On Daiko Denshi Tsushin's ROCE

All in all, it's terrific to see that Daiko Denshi Tsushin is reaping the rewards from prior investments and is growing its capital base. Considering the stock has delivered 26% to its stockholders over the last five years, it may be fair to think that investors aren't fully aware of the promising trends yet. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.

On a final note, we found 4 warning signs for Daiko Denshi Tsushin (1 is concerning) you should be aware of.

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. 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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