The Returns On Capital At Powerwell Holdings Berhad (KLSE:PWRWELL) Don't Inspire Confidence

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. So while Powerwell Holdings Berhad (KLSE:PWRWELL) has a high ROCE right now, lets see what we can decipher from how returns are changing.

What Is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested 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)

0.22 = RM21m ÷ (RM174m - RM80m) (Based on the trailing twelve months to December 2023).

Thus, Powerwell Holdings Berhad has an ROCE of 22%. That's a fantastic return and not only that, it outpaces the average of 11% earned by companies in a similar industry.

Check out our latest analysis for Powerwell Holdings Berhad

In the above chart we have measured Powerwell Holdings Berhad's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Powerwell Holdings Berhad for free.

How Are Returns Trending?

On the surface, the trend of ROCE at Powerwell Holdings Berhad doesn't inspire confidence. While it's comforting that the ROCE is high, five years ago it was 30%. 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 side note, Powerwell Holdings Berhad's current liabilities are still rather high at 46% of total assets. 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.

What We Can Learn From 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 the stock has followed suit returning a meaningful 81% to shareholders over the last three years. So should these growth trends continue, we'd be optimistic on the stock going forward.

Like most companies, Powerwell Holdings Berhad does come with some risks, and we've found 3 warning signs that you should be aware of.

High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.

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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.