Returns On Capital Are Showing Encouraging Signs At TAFI Industries Berhad (KLSE:TAFI)

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. With that in mind, we've noticed some promising trends at TAFI Industries Berhad (KLSE:TAFI) so let's look a bit deeper.

What Is Return On Capital Employed (ROCE)?

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 TAFI Industries Berhad:

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

0.02 = RM1.6m ÷ (RM192m - RM111m) (Based on the trailing twelve months to December 2023).

Therefore, TAFI Industries Berhad has an ROCE of 2.0%. Ultimately, that's a low return and it under-performs the Commercial Services industry average of 5.9%.

Check out our latest analysis for TAFI Industries Berhad

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

How Are Returns Trending?

TAFI Industries Berhad has recently broken into profitability so their prior investments seem to be paying off. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 2.0% on its capital. Not only that, but the company is utilizing 76% more capital than before, but that's to be expected from a company trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Essentially the business now has suppliers or short-term creditors funding about 58% of its operations, which isn't ideal. And with current liabilities at those levels, that's pretty high.

What We Can Learn From TAFI Industries Berhad's ROCE

Long story short, we're delighted to see that TAFI Industries Berhad's reinvestment activities have paid off and the company is now profitable. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for TAFI Industries Berhad (of which 1 is significant!) that you should know about.

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.