Tiong Nam Logistics Holdings Berhad (KLSE:TNLOGIS) Could Be Struggling To Allocate Capital

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after investigating Tiong Nam Logistics Holdings Berhad (KLSE:TNLOGIS), we don't think it's current trends fit the mold of a multi-bagger.

Return On Capital Employed (ROCE): What Is It?

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. Analysts use this formula to calculate it for Tiong Nam Logistics Holdings Berhad:

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

0.048 = RM98m ÷ (RM2.6b - RM592m) (Based on the trailing twelve months to June 2023).

Thus, Tiong Nam Logistics Holdings Berhad has an ROCE of 4.8%. On its own, that's a low figure but it's around the 4.1% average generated by the Logistics industry.

See our latest analysis for Tiong Nam Logistics Holdings Berhad

In the above chart we have measured Tiong Nam Logistics Holdings Berhad's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Tiong Nam Logistics Holdings Berhad here for free.

How Are Returns Trending?

On the surface, the trend of ROCE at Tiong Nam Logistics Holdings Berhad doesn't inspire confidence. Around five years ago the returns on capital were 7.4%, but since then they've fallen to 4.8%. 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.

Our Take On Tiong Nam Logistics Holdings Berhad's ROCE

To conclude, we've found that Tiong Nam Logistics Holdings Berhad is reinvesting in the business, but returns have been falling. And investors appear hesitant that the trends will pick up because the stock has fallen 21% in the last five years. Therefore based on the analysis done in this article, we don't think Tiong Nam Logistics Holdings Berhad has the makings of a multi-bagger.

Tiong Nam Logistics Holdings Berhad does have some risks, we noticed 2 warning signs (and 1 which shouldn't be ignored) we think you should know about.

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.