DKSH Holdings (Malaysia) Berhad (KLSE:DKSH) Could Be Struggling To Allocate Capital

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at DKSH Holdings (Malaysia) Berhad (KLSE:DKSH) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on DKSH Holdings (Malaysia) Berhad is:

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

0.086 = RM108m ÷ (RM2.7b - RM1.4b) (Based on the trailing twelve months to December 2020).

Thus, DKSH Holdings (Malaysia) Berhad has an ROCE of 8.6%. On its own that's a low return, but compared to the average of 6.4% generated by the Trade Distributors industry, it's much better.

See our latest analysis for DKSH Holdings (Malaysia) Berhad

In the above chart we have measured DKSH Holdings (Malaysia) Berhad's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Does the ROCE Trend For DKSH Holdings (Malaysia) Berhad Tell Us?

In terms of DKSH Holdings (Malaysia) Berhad's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 13% over the last five years. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

On a related note, DKSH Holdings (Malaysia) Berhad has decreased its current liabilities to 53% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE. Keep in mind 53% is still pretty high, so those risks are still somewhat prevalent.

What We Can Learn From DKSH Holdings (Malaysia) Berhad's ROCE

In summary, DKSH Holdings (Malaysia) Berhad is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And investors appear hesitant that the trends will pick up because the stock has fallen 13% in the last five years. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

One more thing: We've identified 2 warning signs with DKSH Holdings (Malaysia) Berhad (at least 1 which is a bit unpleasant) , and understanding them would certainly be useful.

While DKSH Holdings (Malaysia) Berhad 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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