Finding a business that has the potential to grow significantly isn’t easy, but it is possible if we take a look at a few key financial metrics. A common approach is to try to find a business with Return on capital employed (ROCE) which is increasing, in parallel with a amount capital employed. If you see this, it usually means it’s a company with a great business model and plenty of profitable reinvestment opportunities. So when we ran our eyes DI System (TYO: 4421) trend of the ROCE, we liked what we saw.
What is Return on Capital Employed (ROCE)?
For those unsure of what ROCE is, it measures the amount of pre-tax profit a business can generate from the capital employed in its business. The formula for this calculation on DI System is:
Return on capital employed = Earnings before interest and taxes (EBIT) ÷ (Total assets – Current liabilities)
0.13 = JP ¥ 140m ÷ (JP ¥ 1.8b – JP ¥ 692m) (Based on the last twelve months up to December 2020).
So, DI System has a ROCE of 13%. That’s a relatively normal return on capital, and it’s around the 14% generated by the IT industry.
Check out our latest review for the DI system
Above you can see how the current ROCE for DI System compares to its past returns on capital, but you can’t say more about the past. If you’d like to see what analysts are forecasting for the future, you should check out our free report for the DI system.
The ROCE trend
While the returns on capital are good, they haven’t budged much. The company has steadily gained 13% over the past four years, and the capital employed within the company has increased 177% during this period. 13% is pretty standard return, and it provides some comfort knowing that DI System has always earned that amount. Over long periods of time, returns like these may not be too exciting, but with consistency they can pay off in terms of stock price returns.
Furthermore, DI System has been successful in reducing current liabilities to 38% of total assets over the past four years. In reality, suppliers are now funding the activity less, which can reduce some elements of risk.
The bottom line
To sum up, DI System simply reinvested the capital regularly, at these decent rates of return. And long-term investors would be delighted with the 111% return they’ve achieved over the past year. So even though the stock may be “more expensive” than it used to be, we believe that the solid fundamentals warrant this stock for further research.
If you want to know the risks facing the DI system, we have found out 2 warning signs that you need to be aware of.
While DI System does not currently achieve the highest returns, we have compiled a list of companies that currently generate over 25% return on equity. Check it out free list here.
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