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

If you're looking for a multi-bagger, there's a few things to keep an eye out for. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at Dialog Group Berhad (KLSE:DIALOG) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Return On Capital Employed (ROCE): What Is It?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Dialog Group Berhad:

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

0.039 = RM304m ÷ (RM9.1b - RM1.3b) (Based on the trailing twelve months to December 2022).

So, Dialog Group Berhad has an ROCE of 3.9%. Ultimately, that's a low return and it under-performs the Energy Services industry average of 8.7%.

Check out our latest analysis for Dialog Group Berhad

In the above chart we have measured Dialog Group Berhad's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

SWOT Analysis for Dialog Group Berhad

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at Dialog Group Berhad doesn't inspire confidence. Over the last five years, returns on capital have decreased to 3.9% from 9.3% five 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. If these investments prove successful, this can bode very well for long term stock performance.

What We Can Learn From Dialog Group Berhad's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Dialog Group Berhad is reinvesting for growth and has higher sales as a result. These growth trends haven't led to growth returns though, since the stock has fallen 19% over the last five years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

Dialog Group Berhad does have some risks though, and we've spotted 1 warning sign for Dialog Group Berhad that you might be interested in.

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.