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. 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Having said that, from a first glance at Toyo Ventures Holdings Berhad (KLSE:TOYOVEN) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What Is Return On Capital Employed (ROCE)?

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 Toyo Ventures Holdings Berhad:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.0035 = RM1.9m ÷ (RM576m - RM25m) (Based on the trailing twelve months to June 2023).

Therefore, Toyo Ventures Holdings Berhad has an ROCE of 0.3%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 6.9%.

Check out our latest analysis for Toyo Ventures Holdings Berhad

Historical performance is a great place to start when researching a stock so above you can see the gauge for Toyo Ventures Holdings Berhad's ROCE against it's prior returns. If you'd like to look at how Toyo Ventures Holdings Berhad has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is Toyo Ventures Holdings Berhad's ROCE Trending?

In terms of Toyo Ventures Holdings Berhad's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 1.5%, but since then they've fallen to 0.3%. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

The Bottom Line

To conclude, we've found that Toyo Ventures Holdings Berhad is reinvesting in the business, but returns have been falling. Since the stock has gained an impressive 76% 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.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Toyo Ventures Holdings Berhad (of which 1 is concerning!) that you should know about.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.