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

If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. So after we looked into DPI Holdings Berhad (KLSE:DPIH), the trends above didn't look too great.

We've discovered 2 warning signs about DPI Holdings Berhad. View them for free.

Return On Capital Employed (ROCE): What Is It?

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. To calculate this metric for DPI Holdings Berhad, this is the formula:

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

0.045 = RM4.1m ÷ (RM97m - RM7.9m) (Based on the trailing twelve months to November 2024).

Thus, DPI Holdings Berhad has an ROCE of 4.5%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 7.9%.

View our latest analysis for DPI Holdings Berhad

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

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

There is reason to be cautious about DPI Holdings Berhad, given the returns are trending downwards. About five years ago, returns on capital were 11%, however they're now substantially lower than that as we saw above. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. If these trends continue, we wouldn't expect DPI Holdings Berhad to turn into a multi-bagger.

What We Can Learn From DPI Holdings Berhad's ROCE

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. In spite of that, the stock has delivered a 29% return to shareholders who held over 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.

DPI Holdings Berhad does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is a bit unpleasant...

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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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.