The Returns At Tomypak Holdings Berhad (KLSE:TOMYPAK) Provide Us With Signs Of What's To Come

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Tomypak Holdings Berhad (KLSE:TOMYPAK) and its ROCE trend, we weren't exactly thrilled.

What is 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 Tomypak Holdings Berhad:

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

0.0082 = RM1.6m ÷ (RM273m - RM77m) (Based on the trailing twelve months to September 2020).

So, Tomypak Holdings Berhad has an ROCE of 0.8%. Ultimately, that's a low return and it under-performs the Packaging industry average of 11%.

View our latest analysis for Tomypak Holdings Berhad

Above you can see how the current ROCE for Tomypak Holdings Berhad compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Tomypak Holdings Berhad here for free.

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at Tomypak Holdings Berhad doesn't inspire confidence. Around five years ago the returns on capital were 20%, but since then they've fallen to 0.8%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

Our Take On Tomypak Holdings Berhad's ROCE

In summary, Tomypak Holdings Berhad is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And investors may be recognizing these trends since the stock has only returned a total of 13% to shareholders over the last five years. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

Like most companies, Tomypak Holdings Berhad does come with some risks, and we've found 2 warning signs that you should be aware of.

While Tomypak Holdings Berhad isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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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