Returns At D'nonce Technology Bhd (KLSE:DNONCE) Are On The Way Up

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding 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 on that note, D'nonce Technology Bhd (KLSE:DNONCE) looks quite promising in regards to its trends of return on capital.

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)

0.031 = RM4.5m ÷ (RM200m - RM56m) (Based on the trailing twelve months to April 2020).

Therefore, D'nonce Technology Bhd has an ROCE of 3.1%. In absolute terms, that's a low return and it also under-performs the Packaging industry average of 10%.

See our latest analysis for D'nonce Technology Bhd

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating D'nonce Technology Bhd's past further, check out this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

D'nonce Technology Bhd has recently broken into profitability so their prior investments seem to be paying off. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 3.1% on its capital. Not only that, but the company is utilizing 47% more capital than before, but that's to be expected from a company trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

On a related note, the company's ratio of current liabilities to total assets has decreased to 28%, which basically reduces it's funding from the likes of short-term creditors or suppliers. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books.

Our Take On D'nonce Technology Bhd's ROCE

To the delight of most shareholders, D'nonce Technology Bhd has now broken into profitability. And with a respectable 98% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. In light of that, we think it's worth looking further into this stock because if D'nonce Technology Bhd can keep these trends up, it could have a bright future ahead.

D'nonce Technology Bhd does have some risks though, and we've spotted 4 warning signs for D'nonce Technology Bhd that you might be interested in.

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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