Did you know there are some financial metrics that can provide clues of a potential 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. Although, when we looked at Thong Guan Industries Berhad (KLSE:TGUAN), 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. To calculate this metric for Thong Guan Industries Berhad, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.097 = RM105m ÷ (RM1.4b - RM305m) (Based on the trailing twelve months to March 2024).
Thus, Thong Guan Industries Berhad has an ROCE of 9.7%. In absolute terms, that's a low return but it's around the Packaging industry average of 8.6%.
View our latest analysis for Thong Guan Industries Berhad
Above you can see how the current ROCE for Thong Guan Industries Berhad compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Thong Guan Industries Berhad for free.
What Can We Tell From Thong Guan Industries Berhad's ROCE Trend?
In terms of Thong Guan Industries Berhad's historical ROCE trend, it doesn't exactly demand attention. Over the past five years, ROCE has remained relatively flat at around 9.7% and the business has deployed 92% more capital into its operations. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.
In Conclusion...
Long story short, while Thong Guan Industries Berhad has been reinvesting its capital, the returns that it's generating haven't increased. Since the stock has gained an impressive 71% over the last five years, investors must think there's better things to come. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.
Thong Guan Industries Berhad does have some risks though, and we've spotted 2 warning signs for Thong Guan Industries Berhad that you might be interested in.
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.