WMG Holdings Bhd (KLSE:WMG) Shareholders Will Want The ROCE Trajectory To Continue

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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 on that note, WMG Holdings Bhd (KLSE:WMG) looks quite promising in regards to its trends of return on capital.

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

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 WMG Holdings Bhd is:

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

0.015 = RM4.3m ÷ (RM451m - RM175m) (Based on the trailing twelve months to September 2021).

So, WMG Holdings Bhd has an ROCE of 1.5%. Ultimately, that's a low return and it under-performs the Trade Distributors industry average of 6.8%.

See 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're interested in investigating WMG Holdings Bhd's past further, check out this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

The fact that WMG Holdings Bhd is now generating some pre-tax profits from its prior investments is very encouraging. The company was generating losses four years ago, but now it's earning 1.5% which is a sight for sore eyes. Not only that, but the company is utilizing 38% more capital than before, but that's to be expected from a company trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

The Bottom Line On WMG Holdings Bhd's ROCE

In summary, it's great to see that WMG Holdings Bhd has managed to break into profitability and is continuing to reinvest in its business. Astute investors may have an opportunity here because the stock has declined 36% in the last three years. With that in mind, we believe the promising trends warrant this stock for further investigation.

One more thing to note, we've identified 3 warning signs with WMG Holdings Bhd and understanding these should be part of your investment process.

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

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.

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