Widetech (Malaysia) Berhad (KLSE:WIDETEC) Might Not Be A Great Investment

Today we are going to look at Widetech (Malaysia) Berhad (KLSE:WIDETEC) to see whether it might be an attractive investment prospect. In particular, we'll consider its Return On Capital Employed (ROCE), as that can give us insight into how profitably the company is able to employ capital in its business.

First of all, we'll work out how to calculate ROCE. Next, we'll compare it to others in its industry. Finally, we'll look at how its current liabilities affect its ROCE.

What is Return On Capital Employed (ROCE)?

ROCE measures the 'return' (pre-tax profit) a company generates from capital employed in its business. All else being equal, a better business will have a higher ROCE. Overall, it is a valuable metric that has its flaws. Renowned investment researcher Michael Mauboussin has suggested that a high ROCE can indicate that 'one dollar invested in the company generates value of more than one dollar'.

So, How Do We Calculate ROCE?

Analysts use this formula to calculate return on capital employed:

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

Or for Widetech (Malaysia) Berhad:

0.016 = RM657k ÷ (RM42m - RM1.6m) (Based on the trailing twelve months to September 2019.)

Therefore, Widetech (Malaysia) Berhad has an ROCE of 1.6%.

Check out our latest analysis for Widetech (Malaysia) Berhad

Does Widetech (Malaysia) Berhad Have A Good ROCE?

When making comparisons between similar businesses, investors may find ROCE useful. Using our data, Widetech (Malaysia) Berhad's ROCE appears to be significantly below the 11% average in the Machinery industry. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Putting aside Widetech (Malaysia) Berhad's performance relative to its industry, its ROCE in absolute terms is poor - considering the risk of owning stocks compared to government bonds. It is likely that there are more attractive prospects out there.

Our data shows that Widetech (Malaysia) Berhad currently has an ROCE of 1.6%, compared to its ROCE of 0.8% 3 years ago. This makes us think about whether the company has been reinvesting shrewdly. You can see in the image below how Widetech (Malaysia) Berhad's ROCE compares to its industry. Click to see more on past growth.

Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately predict the future. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. How cyclical is Widetech (Malaysia) Berhad? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.

How Widetech (Malaysia) Berhad's Current Liabilities Impact Its ROCE

Current liabilities include invoices, such as supplier payments, short-term debt, or a tax bill, that need to be paid within 12 months. Due to the way ROCE is calculated, a high level of current liabilities makes a company look as though it has less capital employed, and thus can (sometimes unfairly) boost the ROCE. To counter this, investors can check if a company has high current liabilities relative to total assets.

Widetech (Malaysia) Berhad has total assets of RM42m and current liabilities of RM1.6m. Therefore its current liabilities are equivalent to approximately 3.7% of its total assets. Widetech (Malaysia) Berhad has very few current liabilities, which have a minimal effect on its already low ROCE.

What We Can Learn From Widetech (Malaysia) Berhad's ROCE

Nonetheless, there may be better places to invest your capital. But note: make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).

For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.