Returns On Capital Are Showing Encouraging Signs At Digistar Corporation Berhad (KLSE:DIGISTA)

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, 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. So on that note, Digistar Corporation Berhad (KLSE:DIGISTA) looks quite promising in regards to its trends of return on capital.

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

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Digistar Corporation Berhad is:

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

0.053 = RM14m ÷ (RM314m - RM51m) (Based on the trailing twelve months to December 2023).

Therefore, Digistar Corporation Berhad has an ROCE of 5.3%. Ultimately, that's a low return and it under-performs the IT industry average of 17%.

Check out our latest analysis for Digistar Corporation Berhad

Historical performance is a great place to start when researching a stock so above you can see the gauge for Digistar Corporation Berhad's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Digistar Corporation Berhad.

The Trend Of ROCE

Digistar Corporation Berhad has not disappointed in regards to ROCE growth. We found that the returns on capital employed over the last five years have risen by 37%. That's not bad because this tells for every dollar invested (capital employed), the company is increasing the amount earned from that dollar. Interestingly, the business may be becoming more efficient because it's applying 23% less capital than it was five years ago. If this trend continues, the business might be getting more efficient but it's shrinking in terms of total assets.

What We Can Learn From Digistar Corporation Berhad's ROCE

From what we've seen above, Digistar Corporation Berhad has managed to increase it's returns on capital all the while reducing it's capital base. And since the stock has fallen 52% over the last five years, there might be an opportunity here. With that in mind, we believe the promising trends warrant this stock for further investigation.

One more thing: We've identified 3 warning signs with Digistar Corporation Berhad (at least 1 which doesn't sit too well with us) , and understanding them would certainly be useful.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.