Stock Analysis

Has Toyo Ink Group Berhad (KLSE:TOYOVEN) Got What It Takes To Become A Multi-Bagger?

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KLSE:TOYOVEN
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If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after briefly looking over the numbers, we don't think Toyo Ink Group Berhad (KLSE:TOYOVEN) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding 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. The formula for this calculation on Toyo Ink Group Berhad is:

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

0.019 = RM8.0m ÷ (RM446m - RM19m) (Based on the trailing twelve months to March 2020).

So, Toyo Ink Group Berhad has an ROCE of 1.9%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 6.6%.

Check out our latest analysis for Toyo Ink Group Berhad

roce
KLSE:TOYOVEN Return on Capital Employed November 26th 2020

Historical performance is a great place to start when researching a stock so above you can see the gauge for Toyo Ink Group Berhad's ROCE against it's prior returns. If you're interested in investigating Toyo Ink Group Berhad's past further, check out this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

In terms of Toyo Ink Group Berhad's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 1.9% from 2.9% five years ago. 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'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 related note, Toyo Ink Group Berhad has decreased its current liabilities to 4.3% of total assets. That could partly explain why the ROCE has dropped. 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. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

Our Take On Toyo Ink Group Berhad's ROCE

Bringing it all together, while we're somewhat encouraged by Toyo Ink Group Berhad's reinvestment in its own business, we're aware that returns are shrinking. Since the stock has gained an impressive 41% over the last five years, investors must think there's better things to come. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

If you'd like to know about the risks facing Toyo Ink Group Berhad, we've discovered 2 warning signs that you should be aware of.

While Toyo Ink Group 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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