Dufu Technology Berhad (KLSE:DUFU) Might Become A Compounding Machine

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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 Dufu Technology Berhad's (KLSE:DUFU) trend of ROCE, we really liked what we saw.

Understanding 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. Analysts use this formula to calculate it for Dufu Technology Berhad:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.29 = RM109m ÷ (RM408m - RM28m) (Based on the trailing twelve months to September 2023).

So, Dufu Technology Berhad has an ROCE of 29%. In absolute terms that's a great return and it's even better than the Machinery industry average of 8.2%.

See our latest analysis for Dufu Technology Berhad

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of Dufu Technology Berhad, check out these free graphs here.

How Are Returns Trending?

It's hard not to be impressed by Dufu Technology Berhad's returns on capital. The company has consistently earned 29% for the last five years, and the capital employed within the business has risen 130% in that time. Returns like this are the envy of most businesses and given it has repeatedly reinvested at these rates, that's even better. If Dufu Technology Berhad can keep this up, we'd be very optimistic about its future.

On a side note, Dufu Technology Berhad has done well to reduce current liabilities to 6.9% of total assets over the last five years. Effectively suppliers now fund less of the business, which can lower some elements of risk.

In Conclusion...

Dufu Technology Berhad has demonstrated its proficiency by generating high returns on increasing amounts of capital employed, which we're thrilled about. On top of that, the stock has rewarded shareholders with a remarkable 171% return to those who've held over the last five years. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.

Like most companies, Dufu Technology Berhad does come with some risks, and we've found 2 warning signs that you should be aware of.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets 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.