Returns On Capital At Dayang Enterprise Holdings Bhd (KLSE:DAYANG) Paint A Concerning Picture

When we're researching a company, it's sometimes hard to find the warning signs, but there are some financial metrics that can help spot trouble early. When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. On that note, looking into Dayang Enterprise Holdings Bhd (KLSE:DAYANG), we weren't too upbeat about how things were going.

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. The formula for this calculation on Dayang Enterprise Holdings Bhd is:

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

0.036 = RM75m ÷ (RM2.4b - RM381m) (Based on the trailing twelve months to June 2022).

Therefore, Dayang Enterprise Holdings Bhd has an ROCE of 3.6%. In absolute terms, that's a low return and it also under-performs the Energy Services industry average of 7.6%.

Check out our latest analysis for Dayang Enterprise Holdings Bhd

In the above chart we have measured Dayang Enterprise Holdings Bhd's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Dayang Enterprise Holdings Bhd here for free.

What Can We Tell From Dayang Enterprise Holdings Bhd's ROCE Trend?

We are a bit worried about the trend of returns on capital at Dayang Enterprise Holdings Bhd. Unfortunately the returns on capital have diminished from the 5.1% that they were earning five years ago. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. If these trends continue, we wouldn't expect Dayang Enterprise Holdings Bhd to turn into a multi-bagger.

The Bottom Line On Dayang Enterprise Holdings Bhd's ROCE

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. But investors must be expecting an improvement of sorts because over the last five yearsthe stock has delivered a respectable 68% return. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

If you're still interested in Dayang Enterprise Holdings Bhd it's worth checking out our FREE intrinsic value approximation to see if it's trading at an attractive price in other respects.

While Dayang Enterprise Holdings Bhd may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.