Should You Be Impressed By WCT Holdings Berhad's (KLSE:WCT) Returns on Capital?

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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 WCT Holdings Berhad (KLSE:WCT) 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. The formula for this calculation on WCT Holdings Berhad is:

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

0.016 = RM108m ÷ (RM8.8b - RM2.2b) (Based on the trailing twelve months to September 2020).

Thus, WCT Holdings Berhad has an ROCE of 1.6%. In absolute terms, that's a low return and it also under-performs the Construction industry average of 4.9%.

View our latest analysis for WCT Holdings Berhad

Above you can see how the current ROCE for WCT Holdings Berhad compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering WCT Holdings Berhad here for free.

What Does the ROCE Trend For WCT Holdings Berhad Tell Us?

The returns on capital haven't changed much for WCT Holdings Berhad in recent years. Over the past five years, ROCE has remained relatively flat at around 1.6% and the business has deployed 31% more capital into its operations. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

The Key Takeaway

As we've seen above, WCT Holdings Berhad's returns on capital haven't increased but it is reinvesting in the business. And investors appear hesitant that the trends will pick up because the stock has fallen 67% in the last five years. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

One more thing to note, we've identified 1 warning sign with WCT Holdings Berhad and understanding this should be part of your investment process.

While WCT Holdings Berhad isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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This article by Simply Wall St is general in nature. 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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