Wong Engineering Corporation Berhad (KLSE:WONG) Might Have The Makings Of A Multi-Bagger

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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 on that note, Wong Engineering Corporation Berhad (KLSE:WONG) looks quite promising in regards to its trends of return on capital.

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

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Wong Engineering Corporation Berhad, this is the formula:

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

0.13 = RM12m ÷ (RM103m - RM15m) (Based on the trailing twelve months to July 2021).

Thus, Wong Engineering Corporation Berhad has an ROCE of 13%. On its own, that's a standard return, however it's much better than the 9.7% generated by the Machinery industry.

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'd like to look at how Wong Engineering Corporation Berhad has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is Wong Engineering Corporation Berhad's ROCE Trending?

We're delighted to see that Wong Engineering Corporation Berhad 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 five years ago but is is now generating 13% on its capital. Not only that, but the company is utilizing 58% 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.

What We Can Learn From Wong Engineering Corporation Berhad's ROCE

Long story short, we're delighted to see that Wong Engineering Corporation Berhad's reinvestment activities have paid off and the company is now profitable. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. 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.

Wong Engineering Corporation Berhad does have some risks though, and we've spotted 2 warning signs for Wong Engineering Corporation Berhad that you might be interested in.

While Wong Engineering Corporation Berhad 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.

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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