Daily Journal (NASDAQ:DJCO) Is Experiencing Growth In Returns On Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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 on that note, Daily Journal (NASDAQ:DJCO) looks quite promising in regards to its trends of return on capital.

Understanding Return On Capital Employed (ROCE)

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 Daily Journal is:

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

0.024 = US$8.0m ÷ (US$370m - US$42m) (Based on the trailing twelve months to June 2024).

Thus, Daily Journal has an ROCE of 2.4%. Ultimately, that's a low return and it under-performs the Software industry average of 8.6%.

View our latest analysis for Daily Journal

Historical performance is a great place to start when researching a stock so above you can see the gauge for Daily Journal'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 Daily Journal.

The Trend Of ROCE

The fact that Daily Journal is now generating some pre-tax profits from its prior investments is very encouraging. About five years ago the company was generating losses but things have turned around because it's now earning 2.4% on its capital. In addition to that, Daily Journal is employing 49% more capital than previously which is expected of a company that's trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

The Key Takeaway

In summary, it's great to see that Daily Journal has managed to break into profitability and is continuing to reinvest in its business. Since the stock has returned a staggering 144% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it's worth looking further into this stock because if Daily Journal can keep these trends up, it could have a bright future ahead.

One more thing to note, we've identified 1 warning sign with Daily Journal and understanding it should be part of your investment process.

While Daily Journal 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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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.