We Like Teck Guan Perdana Berhad's (KLSE:TECGUAN) Returns And Here's How They're Trending

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. So when we looked at the ROCE trend of Teck Guan Perdana Berhad (KLSE:TECGUAN) we really liked what we saw.

Understanding 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. 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)

0.24 = RM25m ÷ (RM219m - RM116m) (Based on the trailing twelve months to January 2022).

Therefore, Teck Guan Perdana Berhad has an ROCE of 24%. In absolute terms that's a great return and it's even better than the Food industry average of 11%.

See our latest analysis for Teck Guan Perdana 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 want to delve into the historical earnings, revenue and cash flow of Teck Guan Perdana Berhad, check out these free graphs here.

The Trend Of ROCE

Teck Guan Perdana Berhad is showing promise given that its ROCE is trending up and to the right. The figures show that over the last five years, ROCE has grown 110% whilst employing roughly the same amount of capital. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.

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 53% of its operations, which isn't ideal. And with current liabilities at those levels, that's pretty high.

The Key Takeaway

To bring it all together, Teck Guan Perdana Berhad has done well to increase the returns it's generating from its capital employed. Given the stock has declined 28% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. With that in mind, we believe the promising trends warrant this stock for further investigation.

Teck Guan Perdana Berhad does come with some risks though, we found 4 warning signs in our investment analysis, and 1 of those makes us a bit uncomfortable...

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high 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.