WMG Holdings Bhd (KLSE:WMG) Is Doing The Right Things To Multiply Its Share Price

Simply Wall St
May 17, 2021
Source: Shutterstock

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So when we looked at WMG Holdings Bhd (KLSE:WMG) and its trend of ROCE, we really liked what we saw.

Return On Capital Employed (ROCE): What is it?

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)

0.012 = RM3.5m ÷ (RM460m - RM171m) (Based on the trailing twelve months to December 2020).

Thus, WMG Holdings Bhd has an ROCE of 1.2%. Ultimately, that's a low return and it under-performs the Trade Distributors industry average of 6.4%.

See our latest analysis for WMG Holdings Bhd

KLSE:WMG Return on Capital Employed May 18th 2021

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating WMG Holdings Bhd's past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From WMG Holdings Bhd's ROCE Trend?

WMG Holdings Bhd has recently broken into profitability so their prior investments seem to be paying off. About four years ago the company was generating losses but things have turned around because it's now earning 1.2% on its capital. Not only that, but the company is utilizing 40,293% 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.

The Key Takeaway

Overall, WMG Holdings Bhd gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. Given the stock has declined 24% in the last three years, this could be a good investment if the valuation and other metrics are also appealing. With that in mind, we believe the promising trends warrant this stock for further investigation.

WMG Holdings Bhd does have some risks, we noticed 4 warning signs (and 2 which make us uncomfortable) we think you should know about.

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.

When trading stocks or any other investment, use the platform considered by many to be the Professional's Gateway to the Worlds Market, Interactive Brokers. You get the lowest-cost* trading on stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

Discounted cash flow calculation for every stock

Simply Wall St does a detailed discounted cash flow calculation every 6 hours for every stock on the market, so if you want to find the intrinsic value of any company just search here. It’s FREE.

Make Confident Investment Decisions

Simply Wall St's Editorial Team provides unbiased, factual reporting on global stocks using in-depth fundamental analysis.
Find out more about our editorial guidelines and team.