The Returns On Capital At DPI Holdings Berhad (KLSE:DPIH) Don't Inspire Confidence

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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 investigating DPI Holdings Berhad (KLSE:DPIH), we don't think it's current trends fit the mold of a multi-bagger.

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

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)

0.033 = RM2.8m ÷ (RM93m - RM7.7m) (Based on the trailing twelve months to May 2023).

So, DPI Holdings Berhad has an ROCE of 3.3%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 6.2%.

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'd like to look at how DPI Holdings Berhad has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at DPI Holdings Berhad doesn't inspire confidence. Around five years ago the returns on capital were 28%, but since then they've fallen to 3.3%. 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.

The Bottom Line On DPI Holdings Berhad's ROCE

To conclude, we've found that DPI Holdings Berhad is reinvesting in the business, but returns have been falling. Since the stock has gained an impressive 74% over the last three years, investors must think there's better things to come. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 4 warning signs for DPI Holdings Berhad (of which 1 is concerning!) that you should know about.

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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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.