What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. So when we looked at Only World Group Holdings Berhad (KLSE:OWG) and its trend of ROCE, we really liked what we saw.
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 Only World Group Holdings Berhad:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.019 = RM6.3m ÷ (RM375m - RM45m) (Based on the trailing twelve months to September 2022).
Thus, Only World Group Holdings Berhad has an ROCE of 1.9%. In absolute terms, that's a low return and it also under-performs the Hospitality industry average of 4.7%.
View our latest analysis for Only World Group Holdings Berhad
Historical performance is a great place to start when researching a stock so above you can see the gauge for Only World Group Holdings Berhad's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Only World Group Holdings Berhad, check out these free graphs here.
What Can We Tell From Only World Group Holdings Berhad's ROCE Trend?
Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. More specifically, while the company has kept capital employed relatively flat over the last five years, the ROCE has climbed 34% in that same time. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.
The Bottom Line On Only World Group Holdings Berhad's ROCE
In summary, we're delighted to see that Only World Group Holdings Berhad has been able to increase efficiencies and earn higher rates of return on the same amount of capital. Given the stock has declined 56% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. With that in mind, we believe the promising trends warrant this stock for further investigation.