UMW Holdings Berhad (KLSE:UMW) Is Doing The Right Things To Multiply Its Share Price

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. Speaking of which, we noticed some great changes in UMW Holdings Berhad's (KLSE:UMW) returns on capital, so let's have a look.

Return On Capital Employed (ROCE): What is it?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for UMW Holdings Berhad, this is the formula:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.025 = RM231m ÷ (RM12b - RM3.0b) (Based on the trailing twelve months to December 2021).

Therefore, UMW Holdings Berhad has an ROCE of 2.5%. In absolute terms, that's a low return and it also under-performs the Auto industry average of 7.6%.

View our latest analysis for UMW Holdings Berhad

Above you can see how the current ROCE for UMW Holdings Berhad compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering UMW Holdings Berhad here for free.

The Trend Of ROCE

It's great to see that UMW Holdings Berhad has started to generate some pre-tax earnings from prior investments. Historically the company was generating losses but as we can see from the latest figures referenced above, they're now earning 2.5% on their capital employed. At first glance, it seems the business is getting more proficient at generating returns, because over the same period, the amount of capital employed has reduced by 21%. This could potentially mean that the company is selling some of its assets.

In Conclusion...

In a nutshell, we're pleased to see that UMW Holdings Berhad has been able to generate higher returns from less capital. And since the stock has fallen 36% 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.

While UMW Holdings Berhad looks impressive, no company is worth an infinite price. The intrinsic value infographic in our free research report helps visualize whether UMW is currently trading for a fair price.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.