The Returns On Capital At DS Sigma Holdings Berhad (KLSE:DSS) Don't Inspire Confidence

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at DS Sigma Holdings Berhad (KLSE:DSS) and its ROCE trend, we weren't exactly thrilled.

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What Is 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. 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)

0.093 = RM11m ÷ (RM135m - RM15m) (Based on the trailing twelve months to March 2025).

Therefore, DS Sigma Holdings Berhad has an ROCE of 9.3%. On its own that's a low return, but compared to the average of 6.6% generated by the Packaging industry, it's much better.

See our latest analysis for DS Sigma Holdings Berhad

Historical performance is a great place to start when researching a stock so above you can see the gauge for DS Sigma Holdings Berhad's ROCE against it's prior returns. If you'd like to look at how DS Sigma Holdings Berhad has performed in the past in other metrics, you can view this free graph of DS Sigma Holdings Berhad's past earnings, revenue and cash flow.

How Are Returns Trending?

When we looked at the ROCE trend at DS Sigma Holdings Berhad, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 9.3% from 45% five years ago. However it looks like DS Sigma 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, DS Sigma Holdings Berhad has decreased its current liabilities to 11% 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 On DS Sigma Holdings Berhad's ROCE

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. And in the last year, the stock has given away 30% so the market doesn't look too hopeful on these trends strengthening any time soon. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

One more thing: We've identified 2 warning signs with DS Sigma Holdings Berhad (at least 1 which can't be ignored) , and understanding them would certainly be useful.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.