Investors Should Be Encouraged By Tomei Consolidated Berhad's (KLSE:TOMEI) Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Speaking of which, we noticed some great changes in Tomei Consolidated Berhad's (KLSE:TOMEI) returns on capital, so let's have a look.

What is 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. To calculate this metric for Tomei Consolidated Berhad, this is the formula:

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

0.22 = RM58m ÷ (RM463m - RM197m) (Based on the trailing twelve months to March 2021).

Therefore, Tomei Consolidated Berhad has an ROCE of 22%. In absolute terms that's a great return and it's even better than the Specialty Retail industry average of 8.3%.

See our latest analysis for Tomei Consolidated Berhad

Above you can see how the current ROCE for Tomei Consolidated 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 Tomei Consolidated Berhad here for free.

What The Trend Of ROCE Can Tell Us

Investors would be pleased with what's happening at Tomei Consolidated Berhad. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 22%. The amount of capital employed has increased too, by 36%. So we're very much inspired by what we're seeing at Tomei Consolidated Berhad thanks to its ability to profitably reinvest capital.

Another thing to note, Tomei Consolidated Berhad has a high ratio of current liabilities to total assets of 43%. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

Our Take On Tomei Consolidated Berhad's ROCE

All in all, it's terrific to see that Tomei Consolidated Berhad is reaping the rewards from prior investments and is growing its capital base. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

One more thing: We've identified 5 warning signs with Tomei Consolidated Berhad (at least 1 which is significant) , and understanding them would certainly be useful.

Tomei Consolidated Berhad is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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