What trends should we look for it we want to identify stocks that can multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at D & O Green Technologies Berhad (KLSE:D&O), it didn't seem to tick all of these boxes.
What Is Return On Capital Employed (ROCE)?
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. To calculate this metric for D & O Green Technologies Berhad, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.10 = RM116m ÷ (RM1.7b - RM555m) (Based on the trailing twelve months to June 2023).
Thus, D & O Green Technologies Berhad has an ROCE of 10%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Semiconductor industry average of 11%.
Check out our latest analysis for D & O Green Technologies Berhad
Above you can see how the current ROCE for D & O Green Technologies Berhad compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
How Are Returns Trending?
On the surface, the trend of ROCE at D & O Green Technologies Berhad doesn't inspire confidence. Over the last five years, returns on capital have decreased to 10% from 21% five years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.
In Conclusion...
To conclude, we've found that D & O Green Technologies Berhad is reinvesting in the business, but returns have been falling. Yet to long term shareholders the stock has gifted them an incredible 301% return in the last five years, so the market appears to be rosy about its future. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.
D & O Green Technologies Berhad does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those can't be ignored...