Investors Will Want Dentsu Group's (TSE:4324) Growth In ROCE To Persist
There are a few key trends to look for if we want to identify the next multi-bagger. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So on that note, Dentsu Group (TSE:4324) looks quite promising in regards to its trends of return on capital.
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. To calculate this metric for Dentsu Group, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.12 = JP¥163b ÷ (JP¥3.1t - JP¥1.8t) (Based on the trailing twelve months to September 2025).
Thus, Dentsu Group has an ROCE of 12%. By itself that's a normal return on capital and it's in line with the industry's average returns of 12%.
See our latest analysis for Dentsu Group
Above you can see how the current ROCE for Dentsu Group compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Dentsu Group for free.
So How Is Dentsu Group's ROCE Trending?
We're pretty happy with how the ROCE has been trending at Dentsu Group. We found that the returns on capital employed over the last five years have risen by 124%. The company is now earning JP¥0.1 per dollar of capital employed. Interestingly, the business may be becoming more efficient because it's applying 27% less capital than it was five years ago. Dentsu Group may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.
On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. The current liabilities has increased to 57% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. And with current liabilities at those levels, that's pretty high.
In Conclusion...
In summary, it's great to see that Dentsu Group has been able to turn things around and earn higher returns on lower amounts of capital. Considering the stock has delivered 22% to its stockholders over the last five years, it may be fair to think that investors aren't fully aware of the promising trends yet. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.
If you'd like to know about the risks facing Dentsu Group, we've discovered 1 warning sign that you should be aware of.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
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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.