If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after investigating Willowglen MSC Berhad (KLSE:WILLOW), we don't think it's current trends fit the mold of a multi-bagger.
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. Analysts use this formula to calculate it for Willowglen MSC Berhad:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.091 = RM17m ÷ (RM209m - RM25m) (Based on the trailing twelve months to June 2022).
Thus, Willowglen MSC Berhad has an ROCE of 9.1%. In absolute terms, that's a low return and it also under-performs the Software industry average of 14%.
See our latest analysis for Willowglen MSC 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 Willowglen MSC Berhad has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
The Trend Of ROCE
In terms of Willowglen MSC Berhad's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 9.1% from 17% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.
Our Take On Willowglen MSC Berhad's ROCE
While returns have fallen for Willowglen MSC Berhad in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. However, despite the promising trends, the stock has fallen 33% over the last five years, so there might be an opportunity here for astute investors. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.
Willowglen MSC Berhad does come with some risks though, we found 4 warning signs in our investment analysis, and 2 of those make us uncomfortable...