If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. Speaking of which, we noticed some great changes in W T K Holdings Berhad's (KLSE:WTK) returns on capital, so let's have a look.
What Is Return On Capital Employed (ROCE)?
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on W T K Holdings Berhad is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.011 = RM11m ÷ (RM1.2b - RM199m) (Based on the trailing twelve months to June 2022).
So, W T K Holdings Berhad has an ROCE of 1.1%. Ultimately, that's a low return and it under-performs the Forestry industry average of 5.9%.
View our latest analysis for W T K Holdings Berhad
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'd like to look at how W T K Holdings Berhad has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
How Are Returns Trending?
It's nice to see that ROCE is headed in the right direction, even if it is still relatively low. The data shows that returns on capital have increased by 72% over the trailing five years. That's not bad because this tells for every dollar invested (capital employed), the company is increasing the amount earned from that dollar. In regards to capital employed, W T K Holdings Berhad appears to been achieving more with less, since the business is using 38% less capital to run its operation. A business that's shrinking its asset base like this isn't usually typical of a soon to be multi-bagger company.
The Bottom Line
In the end, W T K Holdings Berhad has proven it's capital allocation skills are good with those higher returns from less amount of capital. And since the stock has fallen 28% over the last five years, there might be an opportunity here. That being the case, research into the company's current valuation metrics and future prospects seems fitting.
One more thing to note, we've identified 3 warning signs with W T K Holdings Berhad and understanding these should be part of your investment process.