UWC Berhad (KLSE:UWC) Is Achieving High Returns On Its Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at the ROCE trend of UWC Berhad (KLSE:UWC) we really liked what we saw.

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. The formula for this calculation on UWC Berhad is:

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

0.36 = RM115m ÷ (RM359m - RM40m) (Based on the trailing twelve months to July 2021).

So, UWC Berhad has an ROCE of 36%. In absolute terms that's a great return and it's even better than the Machinery industry average of 9.8%.

See our latest analysis for UWC Berhad

In the above chart we have measured UWC 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 UWC Berhad here for free.

What Can We Tell From UWC Berhad's ROCE Trend?

The trends we've noticed at UWC Berhad are quite reassuring. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 36%. Basically the business is earning more per dollar of capital invested and in addition to that, 267% more capital is being employed now too. So we're very much inspired by what we're seeing at UWC Berhad thanks to its ability to profitably reinvest capital.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 11%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books.

Our Take On UWC Berhad's ROCE

All in all, it's terrific to see that UWC Berhad is reaping the rewards from prior investments and is growing its capital base. Since the stock has returned a solid 64% to shareholders over the last year, it's fair to say investors are beginning to recognize these changes. In light of that, we think it's worth looking further into this stock because if UWC Berhad can keep these trends up, it could have a bright future ahead.

On a final note, we've found 1 warning sign for UWC Berhad that we think 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.

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.

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