Returns On Capital Signal Tricky Times Ahead For Turbo-Mech Berhad (KLSE:TURBO)

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Turbo-Mech Berhad (KLSE:TURBO), we don't think it's current trends fit the mold of a multi-bagger.

What Is Return On Capital Employed (ROCE)?

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 Turbo-Mech Berhad is:

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

0.022 = RM2.8m ÷ (RM137m - RM5.1m) (Based on the trailing twelve months to March 2024).

So, Turbo-Mech Berhad has an ROCE of 2.2%. Ultimately, that's a low return and it under-performs the Trade Distributors industry average of 9.0%.

See our latest analysis for Turbo-Mech 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 Turbo-Mech Berhad has performed in the past in other metrics, you can view this free graph of Turbo-Mech Berhad's past earnings, revenue and cash flow.

So How Is Turbo-Mech Berhad's ROCE Trending?

On the surface, the trend of ROCE at Turbo-Mech Berhad doesn't inspire confidence. Over the last five years, returns on capital have decreased to 2.2% from 4.2% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

The Key Takeaway

Bringing it all together, while we're somewhat encouraged by Turbo-Mech Berhad's reinvestment in its own business, we're aware that returns are shrinking. And investors may be recognizing these trends since the stock has only returned a total of 8.4% to shareholders over the last five years. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Turbo-Mech Berhad (of which 2 are potentially serious!) that you should know about.

While Turbo-Mech Berhad isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.