Some Investors May Be Worried About UWC Berhad's (KLSE:UWC) Returns On Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. However, after briefly looking over the numbers, we don't think UWC Berhad (KLSE:UWC) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What Is 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. To calculate this metric for UWC Berhad, this is the formula:

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

0.041 = RM19m ÷ (RM500m - RM40m) (Based on the trailing twelve months to April 2024).

Thus, UWC Berhad has an ROCE of 4.1%. Ultimately, that's a low return and it under-performs the Machinery industry average of 6.6%.

View our latest analysis for UWC Berhad

Above you can see how the current ROCE for UWC Berhad compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for UWC Berhad .

What Does the ROCE Trend For UWC Berhad Tell Us?

When we looked at the ROCE trend at UWC Berhad, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 4.1% from 26% five years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

What We Can Learn From UWC Berhad's ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for UWC Berhad have fallen, meanwhile the business is employing more capital than it was five years ago. Since the stock has skyrocketed 395% over the last five years, it looks like investors have high expectations of the stock. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

Like most companies, UWC Berhad does come with some risks, and we've found 1 warning sign that you should be aware of.

While UWC 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.