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To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. Speaking of which, we noticed some great changes in WMG Holdings Bhd's (KLSE:WMG) returns on capital, so let's have a look.
Return On Capital Employed (ROCE): What Is It?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for WMG Holdings Bhd, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.052 = RM14m ÷ (RM419m - RM154m) (Based on the trailing twelve months to September 2023).
So, WMG Holdings Bhd has an ROCE of 5.2%. On its own, that's a low figure but it's around the 5.6% average generated by the Trade Distributors industry.
Check out our latest analysis for WMG Holdings Bhd
Historical performance is a great place to start when researching a stock so above you can see the gauge for WMG Holdings Bhd's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of WMG Holdings Bhd, check out these free graphs here.
What The Trend Of ROCE Can Tell Us
We're delighted to see that WMG Holdings Bhd is reaping rewards from its investments and has now broken into profitability. While the business was unprofitable in the past, it's now turned things around and is earning 5.2% on its capital. While returns have increased, the amount of capital employed by WMG Holdings Bhd has remained flat over the period. 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. Because in the end, a business can only get so efficient.
In Conclusion...
To sum it up, WMG Holdings Bhd is collecting higher returns from the same amount of capital, and that's impressive. And since the stock has fallen 17% over the last five years, there might be an opportunity here. With that in mind, we believe the promising trends warrant this stock for further investigation.
WMG Holdings Bhd does have some risks though, and we've spotted 2 warning signs for WMG Holdings Bhd that you might be interested in.