There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding 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. Although, when we looked at TPC Plus Berhad (KLSE:TPC), it didn't seem to tick all of these boxes.
What Is Return On Capital Employed (ROCE)?
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on TPC Plus Berhad is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.0032 = RM509k ÷ (RM316m - RM155m) (Based on the trailing twelve months to September 2024).
Therefore, TPC Plus Berhad has an ROCE of 0.3%. Ultimately, that's a low return and it under-performs the Food industry average of 8.3%.
Check out our latest analysis for TPC Plus 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're interested in investigating TPC Plus Berhad's past further, check out this free graph covering TPC Plus Berhad's past earnings, revenue and cash flow.
What Can We Tell From TPC Plus Berhad's ROCE Trend?
When we looked at the ROCE trend at TPC Plus Berhad, we didn't gain much confidence. To be more specific, ROCE has fallen from 18% over the last five years. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.
While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 49%, which has impacted the ROCE. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. What this means is that in reality, a rather large portion of the business is being funded by the likes of the company's suppliers or short-term creditors, which can bring some risks of its own.
The Bottom Line On TPC Plus Berhad's ROCE
To conclude, we've found that TPC Plus Berhad is reinvesting in the business, but returns have been falling. Unsurprisingly, the stock has only gained 16% over the last five years, which potentially indicates that investors are accounting for this going forward. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.