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What are the early trends we should look for to identify a stock that could multiply in value over the long term? Amongst other things, we’ll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company’s 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. Speaking of which, we noticed some great changes in DPS Resources Berhad’s (KLSE:DPS) returns on capital, so let’s have a look.
Understanding 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. To calculate this metric for DPS Resources Berhad, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.016 = RM3.0m ÷ (RM212m – RM29m) (Based on the trailing twelve months to September 2022).
So, DPS Resources Berhad has an ROCE of 1.6%. Ultimately, that’s a low return and it under-performs the Consumer Durables industry average of 11%.
View our latest analysis for DPS Resources Berhad
Historical performance is a great place to start when researching a stock so above you can see the gauge for DPS Resources Berhad’s ROCE against it’s prior returns. If you want to delve into the historical earnings, revenue and cash flow of DPS Resources Berhad, check out these free graphs here.
What Does the ROCE Trend For DPS Resources Berhad Tell Us?
We’re delighted to see that DPS Resources Berhad is reaping rewards from its investments and is now generating some pre-tax profits. The company was generating losses five years ago, but now it’s earning 1.6% which is a sight for sore eyes. Not only that, but the company is utilizing 60% more capital than before, but that’s to be expected from a company trying to break into profitability. 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. Essentially the business now has suppliers or short-term creditors funding about 14% of its operations, which isn’t ideal. Keep an eye out for future increases because when the ratio of current liabilities to total assets gets particularly high, this can introduce some new risks for the business.
The Key Takeaway
In summary, it’s great to see that DPS Resources Berhad has managed to break into profitability and is continuing to reinvest in its business.
DPS Resources Berhad does have some risks, we noticed 3 warning signs (and 1 which doesn’t sit too well with us) we think you should know about.
While DPS Resources 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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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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