Dialog Group Berhad (KLSE:DIALOG) Might Be Having Difficulty Using Its Capital Effectively

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Dialog Group Berhad (KLSE:DIALOG) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Return On Capital Employed (ROCE): What is it?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Dialog Group Berhad, this is the formula:

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

0.049 = RM340m ÷ (RM8.1b - RM1.1b) (Based on the trailing twelve months to December 2021).

Thus, Dialog Group Berhad has an ROCE of 4.9%. Ultimately, that's a low return and it under-performs the Energy Services industry average of 8.0%.

Check out our latest analysis for Dialog Group Berhad

Above you can see how the current ROCE for Dialog Group Berhad compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Dialog Group Berhad.

What Does the ROCE Trend For Dialog Group Berhad Tell Us?

On the surface, the trend of ROCE at Dialog Group Berhad doesn't inspire confidence. To be more specific, ROCE has fallen from 9.3% over the last five years. 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.

On a related note, Dialog Group Berhad has decreased its current liabilities to 13% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Bottom Line On Dialog Group 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 Dialog Group Berhad. In light of this, the stock has only gained 32% over the last five years. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.

Dialog Group 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.

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.