Stock Analysis

Powerwell Holdings Berhad (KLSE:PWRWELL) Will Be Hoping To Turn Its Returns On Capital Around

KLSE:PWRWELL
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What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. 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 briefly looking over the numbers, we don't think Powerwell Holdings Berhad (KLSE:PWRWELL) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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 Powerwell Holdings Berhad is:

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

0.12 = RM9.8m ÷ (RM159m - RM74m) (Based on the trailing twelve months to March 2023).

Thus, Powerwell Holdings Berhad has an ROCE of 12%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Electrical industry average of 10%.

See our latest analysis for Powerwell Holdings Berhad

roce
KLSE:PWRWELL Return on Capital Employed July 14th 2023

Historical performance is a great place to start when researching a stock so above you can see the gauge for Powerwell Holdings Berhad's ROCE against it's prior returns. If you're interested in investigating Powerwell Holdings Berhad's past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Powerwell Holdings Berhad Tell Us?

When we looked at the ROCE trend at Powerwell Holdings Berhad, we didn't gain much confidence. To be more specific, ROCE has fallen from 31% over the last five years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

On a separate but related note, it's important to know that Powerwell Holdings Berhad has a current liabilities to total assets ratio of 46%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Bottom Line On Powerwell Holdings Berhad's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Powerwell Holdings Berhad is reinvesting for growth and has higher sales as a result. And there could be an opportunity here if other metrics look good too, because the stock has declined 30% in the last three years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for Powerwell Holdings Berhad (of which 1 is a bit concerning!) that you should know about.

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.

Valuation is complex, but we're helping make it simple.

Find out whether Powerwell Holdings Berhad is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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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.

About KLSE:PWRWELL

Powerwell Holdings Berhad

An investment holding company, engages in the design, manufacture, and trading of electrical power distribution products in Malaysia, Bangladesh, Vietnam, Indonesia, Pakistan, Thailand, Singapore, Brunei, Cambodia, and Philippines.

Outstanding track record with excellent balance sheet and pays a dividend.