Returns On Capital Are Showing Encouraging Signs At Dimerco Data System (GTSM:5403)

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So when we looked at Dimerco Data System (GTSM:5403) and its trend of ROCE, we really liked what we saw.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Dimerco Data System is:

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

0.18 = NT$346m ÷ (NT$5.1b - NT$3.1b) (Based on the trailing twelve months to December 2020).

Therefore, Dimerco Data System has an ROCE of 18%. In absolute terms, that's a pretty normal return, and it's somewhat close to the IT industry average of 17%.

See our latest analysis for Dimerco Data System

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

So How Is Dimerco Data System's ROCE Trending?

Dimerco Data System has not disappointed with their ROCE growth. More specifically, while the company has kept capital employed relatively flat over the last five years, the ROCE has climbed 73% in that same time. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Essentially the business now has suppliers or short-term creditors funding about 62% of its operations, which isn't ideal. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.

Our Take On Dimerco Data System's ROCE

To bring it all together, Dimerco Data System has done well to increase the returns it's generating from its capital employed. And a remarkable 308% total return over the last five years tells us that investors are expecting more good things to come in the future. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

If you'd like to know about the risks facing Dimerco Data System, we've discovered 3 warning signs that you should be aware of.

While Dimerco Data System isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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