Wong Engineering Corporation Berhad (KLSE:WONG) Could Be Struggling To Allocate Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, 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. Having said that, from a first glance at Wong Engineering Corporation Berhad (KLSE:WONG) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Wong Engineering Corporation Berhad is:

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

0.035 = RM3.8m ÷ (RM127m - RM17m) (Based on the trailing twelve months to April 2023).

Therefore, Wong Engineering Corporation Berhad has an ROCE of 3.5%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 11%.

Check out our latest analysis for Wong Engineering Corporation Berhad

Historical performance is a great place to start when researching a stock so above you can see the gauge for Wong Engineering Corporation Berhad's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Wong Engineering Corporation Berhad, check out these free graphs here.

SWOT Analysis for Wong Engineering Corporation Berhad

What Can We Tell From Wong Engineering Corporation Berhad's ROCE Trend?

When we looked at the ROCE trend at Wong Engineering Corporation Berhad, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 3.5% from 17% five years ago. However it looks like Wong Engineering Corporation Berhad might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

In Conclusion...

Bringing it all together, while we're somewhat encouraged by Wong Engineering Corporation Berhad's reinvestment in its own business, we're aware that returns are shrinking. And with the stock having returned a mere 28% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

Wong Engineering Corporation Berhad does have some risks, we noticed 4 warning signs (and 1 which is a bit concerning) 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.