DS Sigma Holdings Berhad (KLSE:DSS) Will Want To Turn Around Its Return Trends

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. Although, when we looked at DS Sigma Holdings Berhad (KLSE:DSS), it didn't seem to tick all of these boxes.

Understanding 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. Analysts use this formula to calculate it for DS Sigma Holdings Berhad:

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

0.11 = RM13m ÷ (RM128m - RM12m) (Based on the trailing twelve months to March 2024).

Therefore, DS Sigma Holdings Berhad has an ROCE of 11%. In absolute terms, that's a satisfactory return, but compared to the Packaging industry average of 8.6% it's much better.

Check out our latest analysis for DS Sigma 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 DS Sigma Holdings Berhad's past further, check out this free graph covering DS Sigma Holdings Berhad's past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

In terms of DS Sigma Holdings Berhad's historical ROCE movements, the trend isn't fantastic. Over the last four years, returns on capital have decreased to 11% from 45% four years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

On a side note, DS Sigma Holdings Berhad has done well to pay down its current liabilities to 9.3% of total assets. So we could link some of this to the decrease in ROCE. 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.

The Key Takeaway

In summary, DS Sigma Holdings Berhad is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Since the stock has gained an impressive 12% over the last year, 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.

If you'd like to know more about DS Sigma Holdings Berhad, we've spotted 4 warning signs, and 2 of them make us uncomfortable.

While DS Sigma 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.

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