What are the early trends we should look for to identify a stock that could multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So when we looked at the ROCE trend of Wah Seong Corporation Berhad (KLSE:WASEONG) we really liked what we saw.
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. To calculate this metric for Wah Seong Corporation Berhad, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.22 = RM222m ÷ (RM2.7b - RM1.7b) (Based on the trailing twelve months to December 2022).
So, Wah Seong Corporation Berhad has an ROCE of 22%. In absolute terms that's a great return and it's even better than the Energy Services industry average of 6.6%.
Check out our latest analysis for Wah Seong Corporation Berhad
In the above chart we have measured Wah Seong Corporation 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 Wah Seong Corporation Berhad here for free.
So How Is Wah Seong Corporation Berhad's ROCE Trending?
You'd find it hard not to be impressed with the ROCE trend at Wah Seong Corporation Berhad. We found that the returns on capital employed over the last five years have risen by 132%. The company is now earning RM0.2 per dollar of capital employed. In regards to capital employed, Wah Seong Corporation Berhad appears to been achieving more with less, since the business is using 40% less capital to run its operation. If this trend continues, the business might be getting more efficient but it's shrinking in terms of total assets.
For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Effectively this means that suppliers or short-term creditors are now funding 63% of the business, which is more than it was five years ago. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.