There are a few key trends to look for if we want to identify the next multi-bagger. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So when we looked at TMC Life Sciences Berhad (KLSE:TMCLIFE) and its trend of ROCE, we really liked what we saw.
Return On Capital Employed (ROCE): What Is It?
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. Analysts use this formula to calculate it for TMC Life Sciences Berhad:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.035 = RM37m ÷ (RM1.2b - RM95m) (Based on the trailing twelve months to September 2022).
So, TMC Life Sciences Berhad has an ROCE of 3.5%. In absolute terms, that's a low return and it also under-performs the Healthcare industry average of 13%.
See our latest analysis for TMC Life Sciences Berhad
Historical performance is a great place to start when researching a stock so above you can see the gauge for TMC Life Sciences Berhad's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of TMC Life Sciences Berhad, check out these free graphs here.
How Are Returns Trending?
Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. The data shows that returns on capital have increased substantially over the last five years to 3.5%. The amount of capital employed has increased too, by 45%. 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.
The Bottom Line On TMC Life Sciences Berhad's ROCE
All in all, it's terrific to see that TMC Life Sciences Berhad is reaping the rewards from prior investments and is growing its capital base. Given the stock has declined 23% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. So researching this company further and determining whether or not these trends will continue seems justified.
Before jumping to any conclusions though, we need to know what value we're getting for the current share price. That's where you can check out our FREE intrinsic value estimation that compares the share price and estimated value.
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.
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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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