Returns On Capital - An Important Metric For D'nonce Technology Bhd (KLSE:DNONCE)

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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. 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)

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 D'nonce Technology Bhd:

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).

Thus, 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 11%.

Check out our latest analysis for D'nonce Technology Bhd

In the above chart we have measured D'nonce Technology Bhd'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.

What Does the ROCE Trend For D'nonce Technology Bhd Tell Us?

D'nonce Technology Bhd has recently broken into profitability so their prior investments seem to be paying off. The company was generating losses five years ago, but now it's earning 3.1% which is a sight for sore eyes. 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. 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 28%, which basically reduces it's funding from the likes of short-term creditors or suppliers. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance.

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

To the delight of most shareholders, D'nonce Technology Bhd has now broken into profitability. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. Therefore, we think it would be worth your time to check if these trends are going to continue.

If you'd like to know about the risks facing D'nonce Technology Bhd, we've discovered 4 warning signs that 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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