To find a multi-bagger stock, what underlying trends should we look for in a company? Ideally, a business will show two trends; first growth come back on capital employed (ROCE) and on the other hand, growth amount capital employed. If you see this, it usually means it’s a company with a great business model and lots of profitable reinvestment opportunities. With this in mind, we have noticed some promising trends in TEHO International (Catalist: 5OQ) so let’s look a little deeper.
Return on capital employed (ROCE): what is it?
If you’ve never worked with ROCE before, it measures the “yield” (pre-tax profit) a company generates from the capital used in its business. The formula for this calculation on TEHO International is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.14 = 4.2 million Singapore dollars ÷ (61 million Singapore dollars – 31 million Singapore dollars) (Based on the last twelve months to June 2022).
Thereby, TEHO International has a ROCE of 14%. By itself, this is a standard return, but it is much better than the 5.7% generated by the commercial distributor industry.
Although the past is not indicative of the future, it can be useful to know the historical performance of a company, which is why we have this graph above. If you want to investigate more about TEHO International’s past, check out this free chart of past profits, revenue and cash flow.
So, what is the ROCE trend of TEHO International?
It’s great to see that TEHO International has started generating pre-tax profits from previous investments. The company was generating losses five years ago, but now it has recovered, gaining 14%, which is undoubtedly a relief for some early shareholders. In terms of capital employed, TEHO International is using 64% less capital than five years ago, which at first glance may indicate that the business has become more efficient in generating these returns. TEHO International could sell underperforming assets as ROCE improves.
By the way, we noticed that the improvement in ROCE seems to be partly fueled by an increase in current liabilities. Essentially, the company now has suppliers or short-term creditors funding about 51% of its operations, which is not ideal. Given its fairly high ratio, we remind investors that having current liabilities at these levels can lead to certain risks in certain companies.
In a nutshell, we are delighted to see that TEHO International has been able to generate higher returns with less capital. Given that the stock has returned 25% to its shareholders over the past five years, it may be fair to assume that investors are not yet fully aware of the promising trends. So with that in mind, we think the stock merits further research.
Since virtually every business faces risks, it’s worth knowing about them, and we’ve spotted 4 warning signs for TEHO International (3 of which don’t really suit us!) that you should know.
For those who like to invest in solid companies, look at this free list of companies with strong balance sheets and high returns on equity.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.
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