Stock Analysis

Returns on Capital Paint A Bright Future For Top Glove Corporation Bhd (KLSE:TOPGLOV)

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To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. Speaking of which, we noticed some great changes in Top Glove Corporation Bhd's (KLSE:TOPGLOV) returns on capital, so let's have a look.

What is 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. The formula for this calculation on Top Glove Corporation Bhd is:

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

0.48 = RM3.5b ÷ (RM8.7b - RM1.4b) (Based on the trailing twelve months to February 2022).

Therefore, Top Glove Corporation Bhd has an ROCE of 48%. On its own that's a fantastic return on capital, though it's the same as the Medical Equipment industry average of 48%.

Check out our latest analysis for Top Glove Corporation Bhd

KLSE:TOPGLOV Return on Capital Employed June 2nd 2022

In the above chart we have measured Top Glove Corporation Bhd's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Does the ROCE Trend For Top Glove Corporation Bhd Tell Us?

The trends we've noticed at Top Glove Corporation Bhd are quite reassuring. Over the last five years, returns on capital employed have risen substantially to 48%. The amount of capital employed has increased too, by 258%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

On a related note, the company's ratio of current liabilities to total assets has decreased to 16%, which basically reduces it's funding from the likes of short-term creditors or suppliers. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books.

What We Can Learn From Top Glove Corporation Bhd's ROCE

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Top Glove Corporation Bhd has. Since the stock has returned a solid 83% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. In light of that, we think it's worth looking further into this stock because if Top Glove Corporation Bhd can keep these trends up, it could have a bright future ahead.

Top Glove Corporation Bhd does come with some risks though, we found 5 warning signs in our investment analysis, and 1 of those can't be ignored...

Top Glove Corporation Bhd is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

Valuation is complex, but we're helping make it simple.

Find out whether Top Glove Corporation Bhd is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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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.