Investors Will Want Ho Wah Genting Berhad's (KLSE:HWGB) Growth In ROCE To Persist

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. With that in mind, we've noticed some promising trends at Ho Wah Genting Berhad (KLSE:HWGB) so let's look a bit deeper.

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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 Ho Wah Genting Berhad is:

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

0.011 = RM1.0m ÷ (RM140m - RM44m) (Based on the trailing twelve months to December 2024).

Therefore, Ho Wah Genting Berhad has an ROCE of 1.1%. Ultimately, that's a low return and it under-performs the Electrical industry average of 10%.

View our latest analysis for Ho Wah Genting Berhad

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Ho Wah Genting Berhad has performed in the past in other metrics, you can view this free graph of Ho Wah Genting Berhad's past earnings, revenue and cash flow .

What Can We Tell From Ho Wah Genting Berhad's ROCE Trend?

The fact that Ho Wah Genting Berhad is now generating some pre-tax profits from its prior investments is very encouraging. About five years ago the company was generating losses but things have turned around because it's now earning 1.1% on its capital. In addition to that, Ho Wah Genting Berhad is employing 109% more capital than previously which is expected of a company that's trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 32%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. This tells us that Ho Wah Genting Berhad has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

The Key Takeaway

Long story short, we're delighted to see that Ho Wah Genting Berhad's reinvestment activities have paid off and the company is now profitable. Astute investors may have an opportunity here because the stock has declined 61% in the last five years. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

One more thing, we've spotted 1 warning sign facing Ho Wah Genting Berhad that you might find interesting.

While Ho Wah Genting 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. 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.