Investors Will Want TPC Plus Berhad's (KLSE:TPC) Growth In ROCE To Persist
There are a few key trends to look for if we want to identify the next multi-bagger. 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So on that note, TPC Plus Berhad (KLSE:TPC) looks quite promising in regards to its trends of return on capital.
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. To calculate this metric for TPC Plus Berhad, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.12 = RM10m ÷ (RM228m - RM143m) (Based on the trailing twelve months to December 2022).
Therefore, TPC Plus Berhad has an ROCE of 12%. That's a relatively normal return on capital, and it's around the 11% generated by the Food industry.
Check out our latest analysis for TPC Plus Berhad
Historical performance is a great place to start when researching a stock so above you can see the gauge for TPC Plus Berhad's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of TPC Plus Berhad, check out these free graphs here.
So How Is TPC Plus Berhad's ROCE Trending?
Like most people, we're pleased that TPC Plus Berhad is now generating some pretax earnings. While the business is profitable now, it used to be incurring losses on invested capital five years ago. At first glance, it seems the business is getting more proficient at generating returns, because over the same period, the amount of capital employed has reduced by 27%. The reduction could indicate that the company is selling some assets, and considering returns are up, they appear to be selling the right ones.
On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. The current liabilities has increased to 63% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.
The Bottom Line
In a nutshell, we're pleased to see that TPC Plus Berhad has been able to generate higher returns from less capital. Astute investors may have an opportunity here because the stock has declined 42% in the last five years. With that in mind, we believe the promising trends warrant this stock for further investigation.
TPC Plus Berhad does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those makes us a bit uncomfortable...
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.
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