Investors Could Be Concerned With Tri-Mode System (M) Berhad's (KLSE:TRIMODE) Returns On Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Although, when we looked at Tri-Mode System (M) Berhad (KLSE:TRIMODE), it didn't seem to tick all of these boxes.

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 Tri-Mode System (M) Berhad, this is the formula:

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

0.043 = RM5.7m ÷ (RM147m - RM15m) (Based on the trailing twelve months to March 2023).

So, Tri-Mode System (M) Berhad has an ROCE of 4.3%. Even though it's in line with the industry average of 4.2%, it's still a low return by itself.

View our latest analysis for Tri-Mode System (M) Berhad

Historical performance is a great place to start when researching a stock so above you can see the gauge for Tri-Mode System (M) Berhad's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Tri-Mode System (M) Berhad, check out these free graphs here.

What Does the ROCE Trend For Tri-Mode System (M) Berhad Tell Us?

In terms of Tri-Mode System (M) Berhad's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 11% over the last five years. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

On a related note, Tri-Mode System (M) Berhad has decreased its current liabilities to 10.0% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Bottom Line

We're a bit apprehensive about Tri-Mode System (M) Berhad because despite more capital being deployed in the business, returns on that capital and sales have both fallen. And, the stock has remained flat over the last five years, so investors don't seem too impressed either. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

If you want to continue researching Tri-Mode System (M) Berhad, you might be interested to know about the 3 warning signs that our analysis has discovered.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.