The Returns At Daito Koun (TYO:9367) Provide Us With Signs Of What's To Come

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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Daito Koun (TYO:9367), we don't think it's current trends fit the mold of a multi-bagger.

What is Return On Capital Employed (ROCE)?

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. The formula for this calculation on Daito Koun is:

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

0.082 = JP¥726m ÷ (JP¥12b - JP¥3.3b) (Based on the trailing twelve months to September 2020).

So, Daito Koun has an ROCE of 8.2%. On its own that's a low return, but compared to the average of 3.5% generated by the Infrastructure industry, it's much better.

View our latest analysis for Daito Koun

Historical performance is a great place to start when researching a stock so above you can see the gauge for Daito Koun's ROCE against it's prior returns. If you're interested in investigating Daito Koun's past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From Daito Koun's ROCE Trend?

There hasn't been much to report for Daito Koun's returns and its level of capital employed because both metrics have been steady for the past five years. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. So don't be surprised if Daito Koun doesn't end up being a multi-bagger in a few years time.

In Conclusion...

In summary, Daito Koun isn't compounding its earnings but is generating stable returns on the same amount of capital employed. Although the market must be expecting these trends to improve because the stock has gained 98% over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

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

While Daito Koun 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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