Investors Will Want Texchem Resources Bhd's (KLSE:TEXCHEM) Growth In ROCE To Persist

There are a few key trends to look for if we want to identify the next multi-bagger. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at Texchem Resources Bhd (KLSE:TEXCHEM) and its trend of ROCE, we really liked what we saw.

Understanding Return On Capital Employed (ROCE)

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 Texchem Resources Bhd:

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

0.15 = RM64m ÷ (RM759m - RM333m) (Based on the trailing twelve months to September 2022).

Therefore, Texchem Resources Bhd has an ROCE of 15%. In absolute terms, that's a satisfactory return, but compared to the Industrials industry average of 10% it's much better.

View our latest analysis for Texchem Resources Bhd

Above you can see how the current ROCE for Texchem Resources Bhd compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Texchem Resources Bhd.

What Can We Tell From Texchem Resources Bhd's ROCE Trend?

We like the trends that we're seeing from Texchem Resources Bhd. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 15%. Basically the business is earning more per dollar of capital invested and in addition to that, 28% more capital is being employed now too. So we're very much inspired by what we're seeing at Texchem Resources Bhd thanks to its ability to profitably reinvest capital.

On a separate but related note, it's important to know that Texchem Resources Bhd has a current liabilities to total assets ratio of 44%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line On Texchem Resources Bhd's ROCE

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Texchem Resources Bhd has. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

One more thing, we've spotted 2 warning signs facing Texchem Resources Bhd that you might find interesting.

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.