Returns Are Gaining Momentum At Tek Seng Holdings Berhad (KLSE:TEKSENG)

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, we've noticed some promising trends at Tek Seng Holdings Berhad (KLSE:TEKSENG) so let's look a bit deeper.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Tek Seng Holdings Berhad:

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

0.052 = RM15m ÷ (RM317m - RM25m) (Based on the trailing twelve months to December 2022).

Therefore, Tek Seng Holdings Berhad has an ROCE of 5.2%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 7.8%.

Check out our latest analysis for Tek Seng Holdings Berhad

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

What The Trend Of ROCE Can Tell Us

It's great to see that Tek Seng Holdings Berhad has started to generate some pre-tax earnings from prior investments. While the business is profitable now, it used to be incurring losses on invested capital five years ago. Additionally, the business is utilizing 28% less capital than it was five years ago, and taken at face value, that can mean the company needs less funds at work to get a return. The reduction could indicate that the company is selling some assets, and considering returns are up, they appear to be selling the right ones.

The Bottom Line On Tek Seng Holdings Berhad's ROCE

From what we've seen above, Tek Seng Holdings Berhad has managed to increase it's returns on capital all the while reducing it's capital base. And since the stock has fallen 16% over the last five years, there might be an opportunity here. So researching this company further and determining whether or not these trends will continue seems justified.

On a final note, we've found 3 warning signs for Tek Seng Holdings Berhad that we think 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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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.