Stock Analysis

Returns On Capital Signal Tricky Times Ahead For Powerwell Holdings Berhad (KLSE:PWRWELL)

KLSE:PWRWELL
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There are a few key trends to look for if we want to identify the next multi-bagger. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Although, when we looked at Powerwell Holdings Berhad (KLSE:PWRWELL), it didn't seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from 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)

0.061 = RM5.0m ÷ (RM161m - RM79m) (Based on the trailing twelve months to September 2022).

Thus, Powerwell Holdings Berhad has an ROCE of 6.1%. In absolute terms, that's a low return and it also under-performs the Electrical industry average of 8.8%.

See our latest analysis for Powerwell Holdings Berhad

roce
KLSE:PWRWELL Return on Capital Employed December 27th 2022

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're interested in investigating Powerwell Holdings Berhad's past further, check out this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

In terms of Powerwell Holdings Berhad's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 6.1% from 30% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. 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 49%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

Our Take On Powerwell Holdings Berhad's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Powerwell Holdings Berhad. Furthermore the stock has climbed 16% over the last year, it would appear that investors are upbeat about the future. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

On a final note, we found 2 warning signs for Powerwell Holdings Berhad (1 shouldn't be ignored) 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.

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.