When researching a stock for investment, what can tell us that the company is in decline? When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. And from a first read, things don't look too good at Digistar Corporation Berhad (KLSE:DIGISTA), so let's see why.

Return On Capital Employed (ROCE): What Is It?

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 Digistar Corporation Berhad is:

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

0.052 = RM14m ÷ (RM333m - RM54m) (Based on the trailing twelve months to March 2023).

Thus, Digistar Corporation Berhad has an ROCE of 5.2%. Ultimately, that's a low return and it under-performs the IT industry average of 22%.

View our latest analysis for Digistar Corporation 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'd like to look at how Digistar Corporation Berhad has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Can We Tell From Digistar Corporation Berhad's ROCE Trend?

There is reason to be cautious about Digistar Corporation Berhad, given the returns are trending downwards. To be more specific, the ROCE was 7.5% five years ago, but since then it has dropped noticeably. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Digistar Corporation Berhad becoming one if things continue as they have.

Our Take On Digistar Corporation Berhad's ROCE

In summary, it's unfortunate that Digistar Corporation Berhad is generating lower returns from the same amount of capital. This could explain why the stock has sunk a total of 71% in the last five years. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

One more thing: We've identified 3 warning signs with Digistar Corporation Berhad (at least 2 which don't sit too well with us) , and understanding these would certainly be useful.

While Digistar Corporation 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.