Did you know there are some financial metrics that can provide clues of a potential multi-bagger? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at AWC Berhad (KLSE:AWC), it didn't seem to tick all of these boxes.
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 AWC Berhad:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.018 = RM4.7m ÷ (RM378m - RM116m) (Based on the trailing twelve months to December 2020).
Thus, AWC Berhad has an ROCE of 1.8%. In absolute terms, that's a low return and it also under-performs the Construction industry average of 4.9%.
View our latest analysis for AWC Berhad
Above you can see how the current ROCE for AWC 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
In terms of AWC Berhad's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 8.9% over the last five years. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. 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.
What We Can Learn From AWC Berhad's ROCE
Bringing it all together, while we're somewhat encouraged by AWC Berhad's reinvestment in its own business, we're aware that returns are shrinking. Although the market must be expecting these trends to improve because the stock has gained 42% over the last five years. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.
AWC Berhad does have some risks though, and we've spotted 3 warning signs for AWC Berhad that you might be interested in.
While AWC Berhad may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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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.
