Returns Are Gaining Momentum At WMG Holdings Bhd (KLSE:WMG)

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at WMG Holdings Bhd (KLSE:WMG) and its trend of ROCE, we really liked what we saw.

Understanding 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. Analysts use this formula to calculate it for WMG Holdings Bhd:

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

0.048 = RM12m ÷ (RM412m - RM156m) (Based on the trailing twelve months to December 2023).

So, WMG Holdings Bhd has an ROCE of 4.8%. Ultimately, that's a low return and it under-performs the Trade Distributors industry average of 9.8%.

Check out our latest analysis for WMG Holdings Bhd

Historical performance is a great place to start when researching a stock so above you can see the gauge for WMG Holdings Bhd's ROCE against it's prior returns. If you'd like to look at how WMG Holdings Bhd has performed in the past in other metrics, you can view this free graph of WMG Holdings Bhd's past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

We're delighted to see that WMG Holdings Bhd is reaping rewards from its investments and has now broken into profitability. The company was generating losses five years ago, but has managed to turn it around and as we saw earlier is now earning 4.8%, which is always encouraging. While returns have increased, the amount of capital employed by WMG Holdings Bhd has remained flat over the period. With no noticeable increase in capital employed, it's worth knowing what the company plans on doing going forward in regards to reinvesting and growing the business. Because in the end, a business can only get so efficient.

The Bottom Line On WMG Holdings Bhd's ROCE

As discussed above, WMG Holdings Bhd appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. And with a respectable 60% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

WMG Holdings Bhd does have some risks, we noticed 2 warning signs (and 1 which is significant) we think you should know about.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.