Stock Analysis

The Returns At Powerwell Holdings Berhad (KLSE:PWRWELL) Provide Us With Signs Of What's To Come

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To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Powerwell Holdings Berhad (KLSE:PWRWELL), it didn't seem to tick all of these boxes.

Return On Capital Employed (ROCE): What is it?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Powerwell Holdings Berhad, this is the formula:

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

0.02 = RM1.6m ÷ (RM114m - RM34m) (Based on the trailing twelve months to December 2020).

Therefore, Powerwell Holdings Berhad has an ROCE of 2.0%. In absolute terms, that's a low return and it also under-performs the Electrical industry average of 10%.

View our latest analysis for Powerwell Holdings Berhad

KLSE:PWRWELL Return on Capital Employed March 2nd 2021

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.

How Are Returns Trending?

When we looked at the ROCE trend at Powerwell Holdings Berhad, we didn't gain much confidence. Over the last four years, returns on capital have decreased to 2.0% from 23% four years ago. However it looks like Powerwell Holdings 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.

On a side note, Powerwell Holdings Berhad has done well to pay down its current liabilities to 30% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Key Takeaway

In summary, Powerwell Holdings Berhad is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And investors appear hesitant that the trends will pick up because the stock has fallen 26% in the last year. Therefore based on the analysis done in this article, we don't think Powerwell Holdings Berhad has the makings of a multi-bagger.

If you'd like to know more about Powerwell Holdings Berhad, we've spotted 2 warning signs, and 1 of them doesn't sit too well with us.

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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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.