What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Tex Cycle Technology (M) Berhad (KLSE:TEXCYCL), we don't think it's current trends fit the mold of a multi-bagger.
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 Tex Cycle Technology (M) Berhad, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.057 = RM8.4m ÷ (RM154m - RM6.3m) (Based on the trailing twelve months to September 2022).
Therefore, Tex Cycle Technology (M) Berhad has an ROCE of 5.7%. In absolute terms, that's a low return and it also under-performs the Commercial Services industry average of 10%.
See our latest analysis for Tex Cycle Technology (M) Berhad
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of Tex Cycle Technology (M) Berhad, check out these free graphs here.
So How Is Tex Cycle Technology (M) Berhad's ROCE Trending?
When we looked at the ROCE trend at Tex Cycle Technology (M) Berhad, we didn't gain much confidence. Around five years ago the returns on capital were 17%, but since then they've fallen to 5.7%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.
The Bottom Line On Tex Cycle Technology (M) Berhad's ROCE
While returns have fallen for Tex Cycle Technology (M) Berhad in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. These trends don't appear to have influenced returns though, because the total return from the stock has been mostly flat over the last five years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.
Tex Cycle Technology (M) Berhad does come with some risks though, we found 3 warning signs in our investment analysis, and 2 of those are a bit concerning...