Toyo Ventures Holdings Berhad (KLSE:TOYOVEN) Might Be Having Difficulty Using Its Capital Effectively

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at Toyo Ventures Holdings Berhad (KLSE:TOYOVEN) and its ROCE trend, we weren't exactly thrilled.

Understanding 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 Toyo Ventures Holdings Berhad is:

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

0.00089 = RM492k ÷ (RM573m - RM23m) (Based on the trailing twelve months to March 2023).

So, Toyo Ventures Holdings Berhad has an ROCE of 0.09%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 7.7%.

View our latest analysis for Toyo Ventures Holdings Berhad

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

What Can We Tell From Toyo Ventures Holdings Berhad's ROCE Trend?

When we looked at the ROCE trend at Toyo Ventures Holdings Berhad, we didn't gain much confidence. Around five years ago the returns on capital were 0.7%, but since then they've fallen to 0.09%. However it looks like Toyo Ventures Holdings 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 may take some time before the company starts to see any change in earnings from these investments.

Our Take On Toyo Ventures Holdings Berhad's ROCE

Bringing it all together, while we're somewhat encouraged by Toyo Ventures Holdings Berhad's reinvestment in its own business, we're aware that returns are shrinking. Yet to long term shareholders the stock has gifted them an incredible 181% return in the last five years, so the market appears to be rosy about its future. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

One final note, you should learn about the 2 warning signs we've spotted with Toyo Ventures Holdings Berhad (including 1 which is potentially serious) .

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. 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.