If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, 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 Dialog Group Berhad (KLSE:DIALOG), 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. The formula for this calculation on Dialog Group Berhad is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.033 = RM262m ÷ (RM9.3b - RM1.3b) (Based on the trailing twelve months to June 2023).
Therefore, Dialog Group Berhad has an ROCE of 3.3%. Ultimately, that's a low return and it under-performs the Energy Services industry average of 10%.
See our latest analysis for Dialog Group Berhad
In the above chart we have measured Dialog Group Berhad's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Dialog Group Berhad.
What Does the ROCE Trend For Dialog Group Berhad Tell Us?
When we looked at the ROCE trend at Dialog Group Berhad, we didn't gain much confidence. To be more specific, ROCE has fallen from 10% over the last five years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.
On a side note, Dialog Group Berhad has done well to pay down its current liabilities to 14% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.
Our Take On Dialog Group Berhad's ROCE
In summary, despite lower returns in the short term, we're encouraged to see that Dialog Group Berhad is reinvesting for growth and has higher sales as a result. However, despite the promising trends, the stock has fallen 32% over the last five years, so there might be an opportunity here for astute investors. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.