What trends should we look for it we want to identify stocks that can 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after investigating Teo Guan Lee Corporation Berhad (KLSE:TGL), we don't think it's current trends fit the mold of a multi-bagger.
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 Teo Guan Lee Corporation Berhad is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.085 = RM8.7m ÷ (RM123m - RM20m) (Based on the trailing twelve months to June 2021).
So, Teo Guan Lee Corporation Berhad has an ROCE of 8.5%. In absolute terms, that's a low return but it's around the Specialty Retail industry average of 8.0%.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Teo Guan Lee Corporation Berhad's ROCE against it's prior returns. If you'd like to look at how Teo Guan Lee Corporation Berhad has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
What Does the ROCE Trend For Teo Guan Lee Corporation Berhad Tell Us?
The returns on capital haven't changed much for Teo Guan Lee Corporation Berhad in recent years. The company has employed 22% more capital in the last five years, and the returns on that capital have remained stable at 8.5%. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.
As we've seen above, Teo Guan Lee Corporation Berhad's returns on capital haven't increased but it is reinvesting in the business. Since the stock has gained an impressive 71% over the last five years, 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.
On a final note, we've found 2 warning signs for Teo Guan Lee Corporation Berhad that we think you should be aware of.
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.
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.
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