Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. With that in mind, the ROCE of Teo Guan Lee Corporation Berhad (KLSE:TGL) looks great, so lets see what the trend can tell us.
Understanding 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 Teo Guan Lee Corporation Berhad is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.21 = RM25m ÷ (RM150m - RM30m) (Based on the trailing twelve months to September 2022).
Thus, Teo Guan Lee Corporation Berhad has an ROCE of 21%. In absolute terms that's a very respectable return and compared to the Specialty Retail industry average of 18% it's pretty much on par.
See our latest analysis for Teo Guan Lee Corporation Berhad
Historical performance is a great place to start when researching a stock so above you can see the gauge for Teo Guan Lee Corporation Berhad's ROCE against it's prior returns. If you're interested in investigating Teo Guan Lee Corporation Berhad's past further, check out this free graph of past earnings, revenue and cash flow.
So How Is Teo Guan Lee Corporation Berhad's ROCE Trending?
Investors would be pleased with what's happening at Teo Guan Lee Corporation Berhad. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 21%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 39%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.
The Key Takeaway
All in all, it's terrific to see that Teo Guan Lee Corporation Berhad is reaping the rewards from prior investments and is growing its capital base. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.
Like most companies, Teo Guan Lee Corporation Berhad does come with some risks, and we've found 2 warning signs that you should be aware of.
If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.
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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