The Returns On Capital At Tri-Mode System (M) Berhad (KLSE:TRIMODE) Don't Inspire Confidence

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Tri-Mode System (M) Berhad (KLSE:TRIMODE), it didn't seem to tick all of these boxes.

Understanding 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 Tri-Mode System (M) Berhad is:

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

0.035 = RM4.6m ÷ (RM146m - RM14m) (Based on the trailing twelve months to June 2023).

Thus, Tri-Mode System (M) Berhad has an ROCE of 3.5%. On its own, that's a low figure but it's around the 4.1% average generated by the Logistics industry.

See 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'd like to look at how Tri-Mode System (M) Berhad has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is Tri-Mode System (M) Berhad's ROCE 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 3.5% from 8.2% five years ago. 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 side note, Tri-Mode System (M) Berhad has done well to pay down its current liabilities to 9.9% 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.

The Bottom Line On Tri-Mode System (M) Berhad's ROCE

In summary, we're somewhat concerned by Tri-Mode System (M) Berhad's diminishing returns on increasing amounts of capital. And long term shareholders have watched their investments stay flat over the last five years. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

On a final note, we've found 2 warning signs for Tri-Mode System (M) Berhad that we think you should be aware of.

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.