The Returns On Capital At Tex Cycle Technology (M) Berhad (KLSE:TEXCYCL) Don't Inspire Confidence

To find a multi-bagger stock, what are the underlying trends we should look for in a business? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Although, when we looked at Tex Cycle Technology (M) Berhad (KLSE:TEXCYCL), it didn't seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Tex Cycle Technology (M) Berhad:

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

0.057 = RM8.4m ÷ (RM154m - RM6.3m) (Based on the trailing twelve months to September 2022).

Therefore, Tex Cycle Technology (M) Berhad has an ROCE of 5.7%. Ultimately, that's a low return and it under-performs the Commercial Services industry average of 10%.

Check out our latest analysis for Tex Cycle Technology (M) Berhad

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

How Are Returns Trending?

When we looked at the ROCE trend at Tex Cycle Technology (M) Berhad, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 5.7% from 17% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

The Key Takeaway

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Tex Cycle Technology (M) Berhad. However, despite the promising trends, the stock has fallen 17% over the last five years, so there might be an opportunity here for astute investors. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

If you'd like to know more about Tex Cycle Technology (M) Berhad, we've spotted 3 warning signs, and 2 of them shouldn't be ignored.

While Tex Cycle Technology (M) 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.