Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at DYNAM JAPAN HOLDINGS (HKG:6889) and its ROCE trend, we weren't exactly thrilled.
Return On Capital Employed (ROCE): What Is It?
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for DYNAM JAPAN HOLDINGS, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.034 = JP¥10b ÷ (JP¥366b - JP¥60b) (Based on the trailing twelve months to March 2024).
Therefore, DYNAM JAPAN HOLDINGS has an ROCE of 3.4%. In absolute terms, that's a low return and it also under-performs the Hospitality industry average of 6.6%.
Check out our latest analysis for DYNAM JAPAN HOLDINGS
Historical performance is a great place to start when researching a stock so above you can see the gauge for DYNAM JAPAN HOLDINGS' ROCE against it's prior returns. If you're interested in investigating DYNAM JAPAN HOLDINGS' past further, check out this free graph covering DYNAM JAPAN HOLDINGS' past earnings, revenue and cash flow.
What Does the ROCE Trend For DYNAM JAPAN HOLDINGS Tell Us?
On the surface, the trend of ROCE at DYNAM JAPAN HOLDINGS doesn't inspire confidence. Around five years ago the returns on capital were 13%, but since then they've fallen to 3.4%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.
The Key Takeaway
In summary, despite lower returns in the short term, we're encouraged to see that DYNAM JAPAN HOLDINGS is reinvesting for growth and has higher sales as a result. These growth trends haven't led to growth returns though, since the stock has fallen 53% over the last five years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.
DYNAM JAPAN HOLDINGS does come with some risks though, we found 4 warning signs in our investment analysis, and 2 of those are a bit concerning...
While DYNAM JAPAN HOLDINGS 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.