Should You Be Impressed By Dufu Technology Berhad's (KLSE:DUFU) Returns on Capital?

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Looking at Dufu Technology Berhad (KLSE:DUFU), it does have a high ROCE right now, but lets see how returns are trending.

Understanding Return On Capital Employed (ROCE)

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)

0.26 = RM66m ÷ (RM293m - RM42m) (Based on the trailing twelve months to September 2020).

So, Dufu Technology Berhad has an ROCE of 26%. In absolute terms that's a great return and it's even better than the Machinery industry average of 10%.

Check out our latest analysis for Dufu Technology Berhad

Historical performance is a great place to start when researching a stock so above you can see the gauge for Dufu Technology Berhad's ROCE against it's prior returns. If you're interested in investigating Dufu Technology Berhad's past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Dufu Technology Berhad Tell Us?

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 36% where it was five years ago. 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 Dufu Technology Berhad is reinvesting for growth and has higher sales as a result. And long term investors must be optimistic going forward because the stock has returned a huge 2,283% to shareholders in the last five years. So should these growth trends continue, we'd be optimistic on the stock going forward.

Dufu Technology Berhad could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation on our platform quite valuable.

High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.

When trading Dufu Technology Berhad or any other investment, use the platform considered by many to be the Professional's Gateway to the Worlds Market, Interactive Brokers. You get the lowest-cost* trading on stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

This article by Simply Wall St is general in nature. 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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.