What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. Speaking of which, we noticed some great changes in Divfex Berhad's (KLSE:DFX) returns on capital, so let's have a look.
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. To calculate this metric for Divfex Berhad, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.23 = RM13m ÷ (RM127m - RM71m) (Based on the trailing twelve months to September 2025).
Therefore, Divfex Berhad has an ROCE of 23%. In absolute terms that's a great return and it's even better than the IT industry average of 13%.
Check out our latest analysis for Divfex 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 Divfex Berhad's past further, check out this free graph covering Divfex Berhad's past earnings, revenue and cash flow.
How Are Returns Trending?
The fact that Divfex Berhad is now generating some pre-tax profits from its prior investments is very encouraging. About five years ago the company was generating losses but things have turned around because it's now earning 23% on its capital. And unsurprisingly, like most companies trying to break into the black, Divfex Berhad is utilizing 27% more capital than it was five years ago. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.
On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Effectively this means that suppliers or short-term creditors are now funding 56% of the business, which is more than it was five years ago. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.
The Bottom Line
In summary, it's great to see that Divfex Berhad has managed to break into profitability and is continuing to reinvest in its business. Astute investors may have an opportunity here because the stock has declined 31% in the last five years. With that in mind, we believe the promising trends warrant this stock for further investigation.
If you want to know some of the risks facing Divfex Berhad we've found 3 warning signs (1 is a bit concerning!) that you should be aware of before investing here.
High returns are a key ingredient to strong performance, so check out our free list ofstocks 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.