Will The ROCE Trend At WMG Holdings Bhd (KLSE:WMG) Continue?

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So when we looked at WMG Holdings Bhd (KLSE:WMG) and its trend of ROCE, we really liked what we saw.

What is 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)

0.00088 = RM250k ÷ (RM447m - RM165m) (Based on the trailing twelve months to September 2020).

Thus, WMG Holdings Bhd has an ROCE of 0.09%. In absolute terms, that's a low return and it also under-performs the Trade Distributors industry average of 6.3%.

View 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 past earnings, revenue and cash flow.

The Trend Of ROCE

We're delighted to see that WMG Holdings Bhd is reaping rewards from its investments and is now generating some pre-tax profits. Shareholders would no doubt be pleased with this because the business was loss-making three years ago but is is now generating 0.09% on its capital. Not only that, but the company is utilizing 41% more capital than before, but that's to be expected from a company trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

In Conclusion...

To the delight of most shareholders, WMG Holdings Bhd has now broken into profitability. Astute investors may have an opportunity here because the stock has declined 56% in the last three years. With that in mind, we believe the promising trends warrant this stock for further investigation.

WMG Holdings Bhd does come with some risks though, we found 4 warning signs in our investment analysis, and 2 of those are significant...

While WMG Holdings Bhd 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.

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