Some Investors May Be Worried About Tri-Mode System (M) Berhad's (KLSE:TRIMODE) Returns On Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after briefly looking over the numbers, we don't think Tri-Mode System (M) Berhad (KLSE:TRIMODE) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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 Tri-Mode System (M) Berhad:

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

0.045 = RM4.9m ÷ (RM131m - RM22m) (Based on the trailing twelve months to March 2021).

So, Tri-Mode System (M) Berhad has an ROCE of 4.5%. On its own that's a low return on capital but it's in line with the industry's average returns of 4.5%.

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

Above you can see how the current ROCE for Tri-Mode System (M) 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 Tri-Mode System (M) Berhad here for free.

How Are Returns Trending?

On the surface, the trend of ROCE at Tri-Mode System (M) Berhad doesn't inspire confidence. Over the last five years, returns on capital have decreased to 4.5% from 13% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

On a side note, Tri-Mode System (M) Berhad has done well to pay down its current liabilities to 17% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. 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

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Tri-Mode System (M) Berhad. These trends are starting to be recognized by investors since the stock has delivered a 18% gain to shareholders who've held over the last three years. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.

Like most companies, Tri-Mode System (M) Berhad does come with some risks, and we've found 1 warning sign that you should be aware of.

While Tri-Mode System (M) 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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