Capital Allocation Trends At Tiong Nam Logistics Holdings Berhad (KLSE:TNLOGIS) Aren't Ideal

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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. In light of that, when we looked at Tiong Nam Logistics Holdings Berhad (KLSE:TNLOGIS) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Tiong Nam Logistics Holdings Berhad:

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

0.039 = RM64m ÷ (RM2.1b - RM441m) (Based on the trailing twelve months to December 2021).

Thus, Tiong Nam Logistics Holdings Berhad has an ROCE of 3.9%. On its own that's a low return on capital but it's in line with the industry's average returns of 3.9%.

View our latest analysis for Tiong Nam Logistics Holdings Berhad

Above you can see how the current ROCE for Tiong Nam Logistics Holdings 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 Tiong Nam Logistics Holdings Berhad here for free.

So How Is Tiong Nam Logistics Holdings Berhad's ROCE Trending?

In terms of Tiong Nam Logistics Holdings Berhad's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 3.9% from 10% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

The Bottom Line

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Tiong Nam Logistics Holdings Berhad. These growth trends haven't led to growth returns though, since the stock has fallen 58% over the last five years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

On a final note, we found 2 warning signs for Tiong Nam Logistics Holdings Berhad (1 is a bit concerning) you should be aware of.

While Tiong Nam Logistics Holdings 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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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.