Slowing Rates Of Return At TopGum Industries (TLV:TPGM) Leave Little Room For Excitement

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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. That's why when we briefly looked at TopGum Industries' (TLV:TPGM) ROCE trend, we were pretty happy with what we saw.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from 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)

0.14 = US$2.8m ÷ (US$30m - US$10m) (Based on the trailing twelve months to June 2021).

Therefore, TopGum Industries has an ROCE of 14%. On its own, that's a standard return, however it's much better than the 10% generated by the Personal Products industry.

Our analysis indicates that TPGM is potentially overvalued!

Historical performance is a great place to start when researching a stock so above you can see the gauge for TopGum Industries' ROCE against it's prior returns. If you're interested in investigating TopGum Industries' past further, check out this free graph of past earnings, revenue and cash flow.

So How Is TopGum Industries' ROCE Trending?

While the returns on capital are good, they haven't moved much. The company has employed 80% more capital in the last one year, and the returns on that capital have remained stable at 14%. 14% is a pretty standard return, and it provides some comfort knowing that TopGum Industries has consistently earned this amount. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.

On a side note, TopGum Industries has done well to reduce current liabilities to 34% of total assets over the last one year. Effectively suppliers now fund less of the business, which can lower some elements of risk.

The Bottom Line

To sum it up, TopGum Industries has simply been reinvesting capital steadily, at those decent rates of return. Yet over the last year the stock has declined 15%, so the decline might provide an opening. That's why we think it'd be worthwhile to look further into this stock given the fundamentals are appealing.

While TopGum Industries doesn't shine too bright in this respect, it's still worth seeing if the company is trading at attractive prices. You can find that out with our FREE intrinsic value estimation on our platform.

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.