To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. Having said that, from a first glance at Daythree Digital Berhad (KLSE:DAY3) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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. Analysts use this formula to calculate it for Daythree Digital Berhad:

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

0.13 = RM9.7m ÷ (RM89m - RM12m) (Based on the trailing twelve months to June 2024).

Thus, Daythree Digital Berhad has an ROCE of 13%. In absolute terms, that's a satisfactory return, but compared to the Commercial Services industry average of 8.8% it's much better.

Check out our latest analysis for Daythree Digital Berhad

Historical performance is a great place to start when researching a stock so above you can see the gauge for Daythree Digital Berhad's ROCE against it's prior returns. If you'd like to look at how Daythree Digital Berhad has performed in the past in other metrics, you can view this free graph of Daythree Digital Berhad's past earnings, revenue and cash flow.

So How Is Daythree Digital Berhad's ROCE Trending?

On the surface, the trend of ROCE at Daythree Digital Berhad doesn't inspire confidence. Over the last four years, returns on capital have decreased to 13% from 21% four years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

The Bottom Line

While returns have fallen for Daythree Digital Berhad in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. In light of this, the stock has only gained 1.9% over the last year. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.

On a final note, we found 3 warning signs for Daythree Digital Berhad (1 is concerning) you should be aware of.

While Daythree Digital Berhad isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.