DPI Holdings Berhad (KLSE:DPIH) May Have Issues Allocating Its Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Although, when we looked at DPI Holdings Berhad (KLSE:DPIH), it didn't seem to tick all of these boxes.

What Is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on DPI Holdings Berhad is:

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

0.014 = RM1.2m ÷ (RM91m - RM7.4m) (Based on the trailing twelve months to February 2023).

So, DPI Holdings Berhad has an ROCE of 1.4%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 7.4%.

Check out our latest analysis for DPI Holdings Berhad

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 DPI Holdings Berhad's past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For DPI Holdings Berhad Tell Us?

In terms of DPI Holdings Berhad's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 1.4% from 31% five years ago. However it looks like DPI Holdings Berhad might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

On a related note, DPI Holdings Berhad has decreased its current liabilities to 8.2% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

In Conclusion...

To conclude, we've found that DPI Holdings Berhad is reinvesting in the business, but returns have been falling. Although the market must be expecting these trends to improve because the stock has gained 79% over the last three years. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

One more thing: We've identified 3 warning signs with DPI Holdings Berhad (at least 1 which is a bit unpleasant) , and understanding them would certainly be useful.

While DPI Holdings Berhad may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.