Returns On Capital At TopGum Industries (TLV:TPGM) Paint A Concerning Picture

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. In light of that, when we looked at TopGum Industries (TLV:TPGM) and its ROCE trend, we weren't exactly thrilled.

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

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 TopGum Industries:

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

0.081 = US$4.3m ÷ (US$64m - US$11m) (Based on the trailing twelve months to December 2022).

Thus, TopGum Industries has an ROCE of 8.1%. On its own, that's a low figure but it's around the 9.7% average generated by the Personal Products industry.

See our latest analysis for TopGum Industries

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 TopGum Industries has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is TopGum Industries' ROCE Trending?

When we looked at the ROCE trend at TopGum Industries, we didn't gain much confidence. To be more specific, ROCE has fallen from 22% over the last three years. 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. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a side note, TopGum Industries has done well to pay down its current liabilities to 17% of total assets. Considering it used to be 86%, that's a huge drop in that ratio and it would explain the decline in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

What We Can Learn From TopGum Industries' ROCE

In summary, despite lower returns in the short term, we're encouraged to see that TopGum Industries is reinvesting for growth and has higher sales as a result. And there could be an opportunity here if other metrics look good too, because the stock has declined 11% in the last year. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

If you'd like to know more about TopGum Industries, we've spotted 2 warning signs, and 1 of them makes us a bit uncomfortable.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.