Here's What To Make Of Techbond Group Berhad's (KLSE:TECHBND) Returns On Capital

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. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at Techbond Group Berhad (KLSE:TECHBND) 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)?

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 Techbond Group Berhad, this is the formula:

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

0.093 = RM13m ÷ (RM149m - RM7.1m) (Based on the trailing twelve months to September 2020).

Therefore, Techbond Group Berhad has an ROCE of 9.3%. On its own that's a low return, but compared to the average of 6.5% generated by the Chemicals industry, it's much better.

Check out our latest analysis for Techbond Group 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're interested in investigating Techbond Group Berhad's past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From Techbond Group Berhad's ROCE Trend?

In terms of Techbond Group Berhad's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 32% over the last five years. However it looks like Techbond Group Berhad might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a side note, Techbond Group Berhad has done well to pay down its current liabilities to 4.8% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

Our Take On Techbond Group Berhad's ROCE

Bringing it all together, while we're somewhat encouraged by Techbond Group Berhad's reinvestment in its own business, we're aware that returns are shrinking. Since the stock has gained an impressive 47% over the last year, investors must think there's better things to come. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Techbond Group Berhad (of which 2 are a bit concerning!) that you should know about.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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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