Stock Analysis

D'nonce Technology Bhd's (KLSE:DNONCE) Returns On Capital Are Heading Higher

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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'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. So when we looked at D'nonce Technology Bhd (KLSE:DNONCE) and its trend of ROCE, we really liked what we saw.

Understanding 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. To calculate this metric for D'nonce Technology Bhd, this is the formula:

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

0.088 = RM15m ÷ (RM207m - RM35m) (Based on the trailing twelve months to July 2021).

Therefore, D'nonce Technology Bhd has an ROCE of 8.8%. In absolute terms, that's a low return and it also under-performs the Packaging industry average of 12%.

See our latest analysis for D'nonce Technology Bhd

KLSE:DNONCE Return on Capital Employed November 27th 2021

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?

D'nonce Technology Bhd has recently broken into profitability so their prior investments seem to be paying off. About five years ago the company was generating losses but things have turned around because it's now earning 8.8% on its capital. Not only that, but the company is utilizing 67% more capital than before, but that's to be expected from a company trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

On a related note, the company's ratio of current liabilities to total assets has decreased to 17%, which basically reduces it's funding from the likes of short-term creditors or suppliers. This tells us that D'nonce Technology Bhd has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

Our Take On D'nonce Technology Bhd's ROCE

Overall, D'nonce Technology Bhd gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 8.9% to shareholders. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.

On a separate note, we've found 3 warning signs for D'nonce Technology Bhd you'll probably want to know about.

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.

Valuation is complex, but we're helping make it simple.

Find out whether D'nonce Technology Bhd is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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