We're Watching These Trends At UMW Holdings Berhad (KLSE:UMW)

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, 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 UMW Holdings Berhad (KLSE:UMW), we don't think it's current trends fit the mold of a multi-bagger.

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)

0.03 = RM258m ÷ (RM11b - RM2.8b) (Based on the trailing twelve months to December 2020).

So, UMW Holdings Berhad has an ROCE of 3.0%. In absolute terms, that's a low return and it also under-performs the Auto industry average of 5.3%.

See 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're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What The Trend Of ROCE Can Tell Us

We're a bit concerned with the trends, because the business is applying 27% less capital than it was five years ago and returns on that capital have stayed flat. To us that doesn't look like a multi-bagger because the company appears to be selling assets and it's returns aren't increasing. In addition to that, since the ROCE doesn't scream "quality" at 3.0%, it's hard to get excited about these developments.

On a side note, UMW Holdings Berhad has done well to reduce current liabilities to 24% of total assets over the last five years. This can eliminate some of the risks inherent in the operations because the business has less outstanding obligations to their suppliers and or short-term creditors than they did previously.

The Bottom Line On UMW Holdings Berhad's ROCE

It's a shame to see that UMW Holdings Berhad is effectively shrinking in terms of its capital base. And in the last five years, the stock has given away 49% so the market doesn't look too hopeful on these trends strengthening any time soon. Therefore based on the analysis done in this article, we don't think UMW Holdings Berhad has the makings of a multi-bagger.

If you'd like to know about the risks facing UMW Holdings Berhad, we've discovered 1 warning sign that you should be aware of.

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. 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.
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