Returns On Capital At Tuju Setia Berhad (KLSE:TJSETIA) Paint A Concerning Picture

There are a few key trends to look for if we want to identify the next multi-bagger. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Tuju Setia Berhad (KLSE:TJSETIA), it didn't seem to tick all of these boxes.

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

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Tuju Setia Berhad:

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

0.046 = RM6.3m ÷ (RM337m - RM199m) (Based on the trailing twelve months to June 2022).

Therefore, Tuju Setia Berhad has an ROCE of 4.6%. On its own that's a low return on capital but it's in line with the industry's average returns of 5.5%.

Our analysis indicates that TJSETIA is potentially overvalued!

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

The Trend Of ROCE

When we looked at the ROCE trend at Tuju Setia Berhad, we didn't gain much confidence. Around four years ago the returns on capital were 30%, but since then they've fallen to 4.6%. 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.

On a related note, Tuju Setia Berhad has decreased its current liabilities to 59% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE. Keep in mind 59% is still pretty high, so those risks are still somewhat prevalent.

Our Take On Tuju Setia Berhad's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Tuju Setia Berhad is reinvesting for growth and has higher sales as a result. These growth trends haven't led to growth returns though, since the stock has fallen 43% over the last year. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

On a final note, we found 6 warning signs for Tuju Setia Berhad (2 are a bit unpleasant) you should be aware of.

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.