Yahoo Finance We Like These Underlying Return On Capital Trends At DKSH Holdings (Malaysia) Berhad (KLSE:DKSH)
What are the early trends we should look for to identify a stock that could 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. With that in mind, we've noticed some promising trends at DKSH Holdings (Malaysia) Berhad (KLSE:DKSH) so let's look a bit deeper.
Understanding 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 DKSH Holdings (Malaysia) Berhad, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.19 = RM194m ÷ (RM3.3b - RM2.2b) (Based on the trailing twelve months to June 2024).
So, DKSH Holdings (Malaysia) Berhad has an ROCE of 19%. On its own, that's a standard return, however it's much better than the 7.8% generated by the Trade Distributors industry.
See our latest analysis for DKSH Holdings (Malaysia) Berhad
In the above chart we have measured DKSH Holdings (Malaysia) Berhad's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for DKSH Holdings (Malaysia) Berhad .
What Does the ROCE Trend For DKSH Holdings (Malaysia) Berhad Tell Us?
DKSH Holdings (Malaysia) Berhad's ROCE growth is quite impressive. Looking at the data, we can see that even though capital employed in the business has remained relatively flat, the ROCE generated has risen by 192% over the last five years. So it's likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn't changed considerably. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.
On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Effectively this means that suppliers or short-term creditors are now funding 69% of the business, which is more than it was five years ago. And with current liabilities at those levels, that's pretty high.
Our Take On DKSH Holdings (Malaysia) Berhad's ROCE
To sum it up, DKSH Holdings (Malaysia) Berhad is collecting higher returns from the same amount of capital, and that's impressive. Since the stock has returned a staggering 134% to shareholders over the last five years, it looks like investors are recognizing these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.
One more thing to note, we've identified 1 warning sign with DKSH Holdings (Malaysia) Berhad and understanding this should be part of your investment process.
While DKSH Holdings (Malaysia) Berhad may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
