Is Tri-Mode System (M) Berhad (KLSE:TRIMODE) Likely To Turn Things Around?

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. 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 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. 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)

0.046 = RM4.6m ÷ (RM114m - RM15m) (Based on the trailing twelve months to September 2020).

So, Tri-Mode System (M) Berhad has an ROCE of 4.6%. Even though it's in line with the industry average of 4.6%, it's still a low return by itself.

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

In the above chart we have measured Tri-Mode System (M) Berhad's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Tri-Mode System (M) Berhad here for free.

The Trend Of ROCE

When we looked at the ROCE trend at Tri-Mode System (M) Berhad, we didn't gain much confidence. Over the last four years, returns on capital have decreased to 4.6% from 13% four years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a side note, Tri-Mode System (M) Berhad has done well to pay down its current liabilities to 13% of total assets. So we could link some of this to the decrease in ROCE. 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.

Our Take On Tri-Mode System (M) Berhad's ROCE

To conclude, we've found that Tri-Mode System (M) Berhad is reinvesting in the business, but returns have been falling. Although the market must be expecting these trends to improve because the stock has gained 56% over the last year. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

One more thing, we've spotted 2 warning signs facing Tri-Mode System (M) Berhad that you might find interesting.

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