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If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So, when we ran our eye over DKSH Holdings (Malaysia) Berhad's (KLSE:DKSH) trend of ROCE, we liked what we saw.
Return On Capital Employed (ROCE): What Is It?
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 DKSH Holdings (Malaysia) Berhad, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.15 = RM174m ÷ (RM2.8b - RM1.7b) (Based on the trailing twelve months to June 2022).
Thus, DKSH Holdings (Malaysia) Berhad has an ROCE of 15%. In absolute terms, that's a satisfactory return, but compared to the Trade Distributors industry average of 7.8% it's much better.
Check out our latest analysis for DKSH Holdings (Malaysia) Berhad
Above you can see how the current ROCE for DKSH Holdings (Malaysia) Berhad compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering DKSH Holdings (Malaysia) Berhad here for free.
What Can We Tell From DKSH Holdings (Malaysia) Berhad's ROCE Trend?
The trend of ROCE doesn't stand out much, but returns on a whole are decent. Over the past five years, ROCE has remained relatively flat at around 15% and the business has deployed 106% more capital into its operations. 15% is a pretty standard return, and it provides some comfort knowing that DKSH Holdings (Malaysia) Berhad has consistently earned this amount. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.
On a side note, DKSH Holdings (Malaysia) Berhad has done well to reduce current liabilities to 60% of total assets over the last five years. This can eliminate some of the risks inherent in the operations because the business has less outstanding obligations to their suppliers and or short-term creditors than they did previously. We'd like to see this trend continue though because as it stands today, thats still a pretty high level.
The Key Takeaway
The main thing to remember is that DKSH Holdings (Malaysia) Berhad has proven its ability to continually reinvest at respectable rates of return. And given the stock has only risen 16% over the last five years, we'd suspect the market is beginning to recognize these trends. So to determine if DKSH Holdings (Malaysia) Berhad is a multi-bagger going forward, we'd suggest digging deeper into the company's other fundamentals.