Tomei Consolidated Berhad (KLSE:TOMEI) Is Investing Its Capital With Increasing Efficiency
To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. With that in mind, the ROCE of Tomei Consolidated Berhad (KLSE:TOMEI) looks great, so lets see what the trend can tell us.
Understanding 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. The formula for this calculation on Tomei Consolidated Berhad is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.20 = RM91m ÷ (RM658m - RM212m) (Based on the trailing twelve months to March 2023).
Therefore, Tomei Consolidated Berhad has an ROCE of 20%. In absolute terms that's a very respectable return and compared to the Specialty Retail industry average of 19% it's pretty much on par.
View our latest analysis for Tomei Consolidated Berhad
Historical performance is a great place to start when researching a stock so above you can see the gauge for Tomei Consolidated Berhad's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Tomei Consolidated Berhad, check out these free graphs here.
How Are Returns Trending?
The trends we've noticed at Tomei Consolidated Berhad are quite reassuring. The data shows that returns on capital have increased substantially over the last five years to 20%. Basically the business is earning more per dollar of capital invested and in addition to that, 112% more capital is being employed now too. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.
In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 32%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. This tells us that Tomei Consolidated Berhad has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.
The Key Takeaway
To sum it up, Tomei Consolidated Berhad has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. Therefore, we think it would be worth your time to check if these trends are going to continue.
One final note, you should learn about the 3 warning signs we've spotted with Tomei Consolidated Berhad (including 1 which is a bit concerning) .
If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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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