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What are the early trends we should look for to identify a stock that could multiply in value over the long term? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. With that in mind, we've noticed some promising trends at WMG Holdings Bhd (KLSE:WMG) so let's look a bit deeper.
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 WMG Holdings Bhd:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.04 = RM9.9m ÷ (RM433m - RM183m) (Based on the trailing twelve months to March 2023).
So, WMG Holdings Bhd has an ROCE of 4.0%. Ultimately, that's a low return and it under-performs the Trade Distributors industry average of 8.3%.
View our latest analysis for WMG Holdings Bhd
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating WMG Holdings Bhd's past further, check out this free graph of past earnings, revenue and cash flow.
What Can We Tell From WMG Holdings Bhd's ROCE Trend?
We're delighted to see that WMG Holdings Bhd is reaping rewards from its investments and has now broken into profitability. The company was generating losses five years ago, but has managed to turn it around and as we saw earlier is now earning 4.0%, which is always encouraging. Interestingly, the capital employed by the business has remained relatively flat, so these higher returns are either from prior investments paying off or increased efficiencies. So while we're happy that the business is more efficient, just keep in mind that could mean that going forward the business is lacking areas to invest internally for growth. So if you're looking for high growth, you'll want to see a business's capital employed also increasing.
Another thing to note, WMG Holdings Bhd has a high ratio of current liabilities to total assets of 42%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.