Investors Could Be Concerned With D & O Green Technologies Berhad's (KLSE:D&O) Returns On Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Having said that, from a first glance at D & O Green Technologies Berhad (KLSE:D&O) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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. To calculate this metric for D & O Green Technologies Berhad, this is the formula:

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

0.095 = RM108m ÷ (RM1.7b - RM612m) (Based on the trailing twelve months to September 2023).

So, D & O Green Technologies Berhad has an ROCE of 9.5%. On its own that's a low return on capital but it's in line with the industry's average returns of 9.5%.

See our latest analysis for D & O Green Technologies Berhad

In the above chart we have measured D & O Green Technologies Berhad's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for D & O Green Technologies Berhad .

How Are Returns Trending?

On the surface, the trend of ROCE at D & O Green Technologies Berhad doesn't inspire confidence. Over the last five years, returns on capital have decreased to 9.5% from 21% five 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.

What We Can Learn From D & O Green Technologies Berhad's ROCE

To conclude, we've found that D & O Green Technologies Berhad is reinvesting in the business, but returns have been falling. Yet to long term shareholders the stock has gifted them an incredible 393% return in the last five years, so the market appears to be rosy about its future. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

If you'd like to know about the risks facing D & O Green Technologies Berhad, we've discovered 1 warning sign that you should be aware of.

While D & O Green Technologies Berhad may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.