Returns On Capital Signal Tricky Times Ahead For DPI Holdings Berhad (KLSE:DPIH)

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. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. However, after briefly looking over the numbers, we don't think DPI Holdings Berhad (KLSE:DPIH) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the 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)

0.15 = RM12m ÷ (RM89m - RM8.7m) (Based on the trailing twelve months to February 2021).

Therefore, DPI Holdings Berhad has an ROCE of 15%. On its own, that's a standard return, however it's much better than the 8.0% generated by the Chemicals industry.

See 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.

So How Is DPI Holdings Berhad's ROCE Trending?

In terms of DPI Holdings Berhad's historical ROCE movements, the trend isn't fantastic. Around four years ago the returns on capital were 44%, but since then they've fallen to 15%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

On a related note, DPI Holdings Berhad has decreased its current liabilities to 9.8% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Bottom Line

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for DPI Holdings Berhad. And long term investors must be optimistic going forward because the stock has returned a huge 239% to shareholders in the last year. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

If you want to know some of the risks facing DPI Holdings Berhad we've found 3 warning signs (1 is a bit concerning!) that you should be aware of before investing here.

While DPI Holdings Berhad 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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