What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Having said that, from a first glance at AWC Berhad (KLSE:AWC) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
Understanding 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. The formula for this calculation on AWC Berhad is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.033 = RM9.0m ÷ (RM384m - RM114m) (Based on the trailing twelve months to March 2021).
Therefore, AWC Berhad has an ROCE of 3.3%. Ultimately, that's a low return and it under-performs the Construction industry average of 6.6%.
See our latest analysis for AWC Berhad
In the above chart we have measured AWC Berhad's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
What Does the ROCE Trend For AWC Berhad Tell Us?
When we looked at the ROCE trend at AWC Berhad, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 3.3% from 13% five years ago. However it looks like AWC Berhad might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.
In Conclusion...
To conclude, we've found that AWC Berhad is reinvesting in the business, but returns have been falling. And investors appear hesitant that the trends will pick up because the stock has fallen 34% in the last five years. Therefore based on the analysis done in this article, we don't think AWC Berhad has the makings of a multi-bagger.
One more thing, we've spotted 4 warning signs facing AWC Berhad that you might find interesting.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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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About KLSE:AWC
AWC Berhad
An investment holding company, provides integrated facilities management and engineering services.
Undervalued with excellent balance sheet.
