Be Wary Of Dominant Enterprise Berhad (KLSE:DOMINAN) And Its Returns On Capital

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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at Dominant Enterprise Berhad (KLSE:DOMINAN) and its ROCE trend, we weren't exactly thrilled.

What is 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. The formula for this calculation on Dominant Enterprise Berhad is:

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

0.075 = RM26m ÷ (RM550m - RM210m) (Based on the trailing twelve months to December 2020).

Therefore, Dominant Enterprise Berhad has an ROCE of 7.5%. On its own that's a low return, but compared to the average of 3.2% generated by the Forestry industry, it's much better.

Check out our latest analysis for Dominant Enterprise Berhad

Historical performance is a great place to start when researching a stock so above you can see the gauge for Dominant Enterprise Berhad's ROCE against it's prior returns. If you're interested in investigating Dominant Enterprise Berhad's past further, check out this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

On the surface, the trend of ROCE at Dominant Enterprise Berhad doesn't inspire confidence. To be more specific, ROCE has fallen from 14% over the last five years. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

What We Can Learn From Dominant Enterprise Berhad's ROCE

In summary, we're somewhat concerned by Dominant Enterprise Berhad's diminishing returns on increasing amounts of capital. Investors must expect better things on the horizon though because the stock has risen 3.3% in the last five years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

If you'd like to know more about Dominant Enterprise Berhad, we've spotted 5 warning signs, and 1 of them makes us a bit uncomfortable.

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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