Returns Are Gaining Momentum At DPS Resources Berhad (KLSE:DPS)

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. Speaking of which, we noticed some great changes in DPS Resources Berhad's (KLSE:DPS) returns on capital, so let's have a look.

What is 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. Analysts use this formula to calculate it for DPS Resources Berhad:

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

0.078 = RM13m ÷ (RM209m - RM40m) (Based on the trailing twelve months to September 2021).

Therefore, DPS Resources Berhad has an ROCE of 7.8%. In absolute terms, that's a low return and it also under-performs the Consumer Durables industry average of 12%.

Check out our latest analysis for DPS Resources Berhad

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

The Trend Of ROCE

We're delighted to see that DPS Resources Berhad is reaping rewards from its investments and is now generating some pre-tax profits. The company was generating losses five years ago, but now it's earning 7.8% which is a sight for sore eyes. And unsurprisingly, like most companies trying to break into the black, DPS Resources Berhad is utilizing 43% more capital than it was five years ago. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Essentially the business now has suppliers or short-term creditors funding about 19% of its operations, which isn't ideal. Keep an eye out for future increases because when the ratio of current liabilities to total assets gets particularly high, this can introduce some new risks for the business.

The Key Takeaway

In summary, it's great to see that DPS Resources Berhad has managed to break into profitability and is continuing to reinvest in its business. Since the stock has only returned 19% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.

If you want to continue researching DPS Resources Berhad, you might be interested to know about the 4 warning signs that our analysis has discovered.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.