DKLS Industries Berhad (KLSE:DKLS) Is Doing The Right Things To Multiply Its Share Price
If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So on that note, DKLS Industries Berhad (KLSE:DKLS) looks quite promising in regards to its trends of return on capital.
What Is Return On Capital Employed (ROCE)?
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested 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)
0.085 = RM40m ÷ (RM508m - RM35m) (Based on the trailing twelve months to December 2023).
Thus, DKLS Industries Berhad has an ROCE of 8.5%. Even though it's in line with the industry average of 8.1%, it's still a low return by itself.
View 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'd like to look at how DKLS Industries Berhad has performed in the past in other metrics, you can view this free graph of DKLS Industries Berhad's past earnings, revenue and cash flow.
What Can We Tell From DKLS Industries Berhad's ROCE Trend?
DKLS Industries Berhad has not disappointed with their ROCE growth. 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 153% over the last five years. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. 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.
One more thing to note, DKLS Industries Berhad has decreased current liabilities to 6.8% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. So this improvement in ROCE has come from the business' underlying economics, which is great to see.
The Bottom Line On DKLS Industries Berhad's ROCE
To bring it all together, DKLS Industries Berhad has done well to increase the returns it's generating from its capital employed. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 15% to shareholders. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.
DKLS Industries Berhad does have some risks, we noticed 2 warning signs (and 1 which can't be ignored) we think you should know about.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
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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.
