To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. Having said that, after a brief look, DKLS Industries Berhad (KLSE:DKLS) we aren't filled with optimism, but let's investigate further.
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 DKLS Industries Berhad is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.047 = RM22m ÷ (RM539m - RM83m) (Based on the trailing twelve months to June 2022).
So, DKLS Industries Berhad has an ROCE of 4.7%. Even though it's in line with the industry average of 5.1%, it's still a low return by itself.
See our latest analysis for DKLS Industries Berhad
Historical performance is a great place to start when researching a stock so above you can see the gauge for DKLS Industries Berhad's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of DKLS Industries Berhad, check out these free graphs here.
The Trend Of ROCE
We are a bit worried about the trend of returns on capital at DKLS Industries Berhad. To be more specific, the ROCE was 8.7% five years ago, but since then it has dropped noticeably. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on DKLS Industries Berhad becoming one if things continue as they have.
Our Take On DKLS Industries Berhad's ROCE
All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. In spite of that, the stock has delivered a 39% return to shareholders who held over the last five years. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.
Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for DKLS Industries Berhad (of which 2 are significant!) that you should know about.