D'nonce Technology Bhd (KLSE:DNONCE) Will Want To Turn Around Its Return Trends

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after investigating D'nonce Technology Bhd (KLSE:DNONCE), we don't think it's current trends fit the mold of a multi-bagger.

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. Analysts use this formula to calculate it for D'nonce Technology Bhd:

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

0.0053 = RM1.3m ÷ (RM289m - RM47m) (Based on the trailing twelve months to March 2023).

So, D'nonce Technology Bhd has an ROCE of 0.5%. Ultimately, that's a low return and it under-performs the Packaging industry average of 12%.

View our latest analysis for D'nonce Technology Bhd

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

What Can We Tell From D'nonce Technology Bhd's ROCE Trend?

When we looked at the ROCE trend at D'nonce Technology Bhd, we didn't gain much confidence. To be more specific, ROCE has fallen from 1.3% over the last five years. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

On a side note, D'nonce Technology Bhd has done well to pay down its current liabilities to 16% 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. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Bottom Line On D'nonce Technology Bhd's ROCE

Bringing it all together, while we're somewhat encouraged by D'nonce Technology Bhd's reinvestment in its own business, we're aware that returns are shrinking. And in the last five years, the stock has given away 55% so the market doesn't look too hopeful on these trends strengthening any time soon. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

On a final note, we've found 3 warning signs for D'nonce Technology Bhd that we think you should be aware of.

While D'nonce Technology Bhd isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.