Returns On Capital - An Important Metric For TMC Life Sciences Berhad (KLSE:TMCLIFE)

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. Speaking of which, we noticed some great changes in TMC Life Sciences Berhad's (KLSE:TMCLIFE) returns on capital, so let's have a 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. Analysts use this formula to calculate it for TMC Life Sciences Berhad:

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

0.021 = RM18m ÷ (RM950m - RM70m) (Based on the trailing twelve months to June 2020).

So, TMC Life Sciences Berhad has an ROCE of 2.1%. Ultimately, that's a low return and it under-performs the Healthcare industry average of 10%.

See our latest analysis for TMC Life Sciences Berhad

Historical performance is a great place to start when researching a stock so above you can see the gauge for TMC Life Sciences Berhad's ROCE against it's prior returns. If you'd like to look at how TMC Life Sciences Berhad has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is TMC Life Sciences Berhad's ROCE Trending?

We're glad to see that ROCE is heading in the right direction, even if it is still low at the moment. The data shows that returns on capital have increased substantially over the last five years to 2.1%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 110%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

In Conclusion...

To sum it up, TMC Life Sciences Berhad has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Since the total return from the stock has been almost flat over the last five years, there might be an opportunity here if the valuation looks good. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

If you'd like to know more about TMC Life Sciences Berhad, we've spotted 3 warning signs, and 1 of them makes us a bit uncomfortable.

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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