Some Investors May Be Worried About DFCITY Group Berhad's (KLSE:DFCITY) Returns On Capital

If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. Having said that, after a brief look, DFCITY Group Berhad (KLSE:DFCITY) we aren't filled with optimism, but let's investigate further.

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

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. To calculate this metric for DFCITY Group Berhad, this is the formula:

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

0.014 = RM1.0m ÷ (RM92m - RM22m) (Based on the trailing twelve months to September 2022).

So, DFCITY Group Berhad has an ROCE of 1.4%. Ultimately, that's a low return and it under-performs the Basic Materials industry average of 2.7%.

Our analysis indicates that DFCITY is potentially overvalued!

Historical performance is a great place to start when researching a stock so above you can see the gauge for DFCITY Group Berhad's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of DFCITY Group Berhad, check out these free graphs here.

So How Is DFCITY Group Berhad's ROCE Trending?

There is reason to be cautious about DFCITY Group Berhad, given the returns are trending downwards. About five years ago, returns on capital were 4.0%, however they're now substantially lower than that as we saw above. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on DFCITY Group Berhad becoming one if things continue as they have.

The Bottom Line On DFCITY Group Berhad's ROCE

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. Investors haven't taken kindly to these developments, since the stock has declined 14% from where it was five years ago. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

One more thing: We've identified 5 warning signs with DFCITY Group Berhad (at least 2 which are a bit concerning) , and understanding them would certainly be useful.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.