Teck Guan Perdana Berhad (KLSE:TECGUAN) Hasn't Managed To Accelerate Its Returns

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Having said that, from a first glance at Teck Guan Perdana Berhad (KLSE:TECGUAN) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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. To calculate this metric for Teck Guan Perdana Berhad, this is the formula:

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

0.14 = RM12m ÷ (RM138m - RM54m) (Based on the trailing twelve months to January 2021).

Thus, Teck Guan Perdana Berhad has an ROCE of 14%. On its own, that's a standard return, however it's much better than the 7.3% generated by the Food industry.

See our latest analysis for Teck Guan Perdana Berhad

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

What Does the ROCE Trend For Teck Guan Perdana Berhad Tell Us?

Over the past five years, Teck Guan Perdana Berhad's ROCE has remained relatively flat while the business is using 23% less capital than before. This indicates to us that assets are being sold and thus the business is likely shrinking, which you'll remember isn't the typical ingredients for an up-and-coming multi-bagger. So if this trend continues, don't be surprised if the business is smaller in a few years time.

In Conclusion...

Overall, we're not ecstatic to see Teck Guan Perdana Berhad reducing the amount of capital it employs in the business. Unsurprisingly, the stock has only gained 18% over the last five years, which potentially indicates that investors are accounting for this going forward. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

Teck Guan Perdana Berhad does have some risks, we noticed 3 warning signs (and 1 which is potentially serious) we think you should know about.

While Teck Guan Perdana 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. 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.
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