Returns On Capital - An Important Metric For Tomei Consolidated Berhad (KLSE:TOMEI)

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. So when we looked at Tomei Consolidated Berhad (KLSE:TOMEI) and its trend of ROCE, we really liked what we saw.

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. The formula for this calculation on Tomei Consolidated Berhad is:

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

0.17 = RM40m ÷ (RM466m - RM225m) (Based on the trailing twelve months to September 2020).

So, Tomei Consolidated Berhad has an ROCE of 17%. On its own, that's a standard return, however it's much better than the 10% generated by the Specialty Retail industry.

Check out our latest analysis for Tomei Consolidated Berhad

In the above chart we have measured Tomei Consolidated Berhad's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Tomei Consolidated Berhad.

How Are Returns Trending?

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 17%. The amount of capital employed has increased too, by 26%. 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 48%. 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

To sum it up, Tomei Consolidated Berhad has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Since the stock has returned a solid 77% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

If you want to know some of the risks facing Tomei Consolidated Berhad we've found 3 warning signs (1 is significant!) that you should be aware of before investing here.

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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