Dufu Technology Berhad (KLSE:DUFU) Could Be Struggling To Allocate Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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 when we looked at Dufu Technology Berhad (KLSE:DUFU), they do have a high ROCE, but we weren't exactly elated from how returns are trending.

Our free stock report includes 2 warning signs investors should be aware of before investing in Dufu Technology Berhad. Read for free now.

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. The formula for this calculation on Dufu Technology Berhad is:

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

0.28 = RM111m ÷ (RM447m - RM53m) (Based on the trailing twelve months to December 2024).

So, Dufu Technology Berhad has an ROCE of 28%. In absolute terms that's a great return and it's even better than the Machinery industry average of 8.2%.

Check out our latest analysis for Dufu Technology Berhad

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Dufu Technology Berhad's past further, check out this free graph covering Dufu Technology Berhad's past earnings, revenue and cash flow.

What Can We Tell From Dufu Technology Berhad's ROCE Trend?

On the surface, the trend of ROCE at Dufu Technology Berhad doesn't inspire confidence. To be more specific, while the ROCE is still high, it's fallen from 53% where it was five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

Our Take On Dufu Technology Berhad's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Dufu Technology Berhad. However, despite the promising trends, the stock has fallen 34% over the last five years, so there might be an opportunity here for astute investors. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

Dufu Technology Berhad does have some risks, we noticed 2 warning signs (and 1 which is a bit concerning) we think you should know about.

Dufu Technology Berhad is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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.