If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at DPI Holdings Berhad (KLSE:DPIH) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
What Is Return On Capital Employed (ROCE)?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for DPI Holdings Berhad, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.063 = RM5.5m ÷ (RM95m - RM7.4m) (Based on the trailing twelve months to February 2024).
Therefore, DPI Holdings Berhad has an ROCE of 6.3%. On its own, that's a low figure but it's around the 6.6% average generated by the Chemicals industry.
View our latest analysis for DPI Holdings Berhad
Historical performance is a great place to start when researching a stock so above you can see the gauge for DPI Holdings Berhad's ROCE against it's prior returns. If you'd like to look at how DPI Holdings Berhad has performed in the past in other metrics, you can view this free graph of DPI Holdings Berhad's past earnings, revenue and cash flow.
What Can We Tell From DPI Holdings Berhad's ROCE Trend?
On the surface, the trend of ROCE at DPI Holdings Berhad doesn't inspire confidence. To be more specific, ROCE has fallen from 10% over the last five years. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.
What We Can Learn From DPI Holdings Berhad's ROCE
Bringing it all together, while we're somewhat encouraged by DPI Holdings Berhad's reinvestment in its own business, we're aware that returns are shrinking. Although the market must be expecting these trends to improve because the stock has gained 80% over the last five years. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.