Our Take On The Returns On Capital At Teo Seng Capital Berhad (KLSE:TEOSENG)

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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 Teo Seng Capital Berhad (KLSE:TEOSENG), it didn't seem to tick all of these boxes.

Return On Capital Employed (ROCE): What is it?

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 Teo Seng Capital Berhad is:

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

0.036 = RM15m ÷ (RM591m - RM184m) (Based on the trailing twelve months to December 2020).

Therefore, Teo Seng Capital Berhad has an ROCE of 3.6%. In absolute terms, that's a low return and it also under-performs the Food industry average of 7.7%.

View our latest analysis for Teo Seng Capital 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 Teo Seng Capital Berhad, check out these free graphs here.

How Are Returns Trending?

In terms of Teo Seng Capital Berhad's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 41%, but since then they've fallen to 3.6%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

The Bottom Line On Teo Seng Capital Berhad's ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for Teo Seng Capital Berhad have fallen, meanwhile the business is employing more capital than it was five years ago. Investors haven't taken kindly to these developments, since the stock has declined 29% from where it was five years ago. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

On a final note, we found 3 warning signs for Teo Seng Capital Berhad (1 is concerning) you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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