Be Wary Of Daythree Digital Berhad (KLSE:DAY3) And Its Returns On Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Having said that, from a first glance at Daythree Digital Berhad (KLSE:DAY3) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Daythree Digital Berhad is:

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

0.13 = RM9.7m ÷ (RM89m - RM12m) (Based on the trailing twelve months to June 2024).

Therefore, Daythree Digital Berhad has an ROCE of 13%. In absolute terms, that's a satisfactory return, but compared to the Commercial Services industry average of 8.8% it's much better.

View our latest analysis for Daythree Digital Berhad

Historical performance is a great place to start when researching a stock so above you can see the gauge for Daythree Digital Berhad's ROCE against it's prior returns. If you'd like to look at how Daythree Digital Berhad has performed in the past in other metrics, you can view this free graph of Daythree Digital Berhad's past earnings, revenue and cash flow.

What Does the ROCE Trend For Daythree Digital Berhad Tell Us?

In terms of Daythree Digital Berhad's historical ROCE movements, the trend isn't fantastic. Over the last four years, returns on capital have decreased to 13% from 21% four 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.

The Bottom Line On Daythree Digital 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 Daythree Digital Berhad. However, despite the promising trends, the stock has fallen 14% over the last year, so there might be an opportunity here for astute investors. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Daythree Digital Berhad (of which 1 is potentially serious!) that you should know about.

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.