- Commercial Services
CWG Holdings Berhad (KLSE:CWG) Is Finding It Tricky To Allocate Its Capital
When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. And from a first read, things don't look too good at CWG Holdings Berhad (KLSE:CWG), so let's see why.
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. To calculate this metric for CWG Holdings Berhad, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.068 = RM7.3m ÷ (RM119m - RM12m) (Based on the trailing twelve months to December 2022).
Thus, CWG Holdings Berhad has an ROCE of 6.8%. On its own that's a low return on capital but it's in line with the industry's average returns of 6.8%.
View our latest analysis for CWG Holdings Berhad
Historical performance is a great place to start when researching a stock so above you can see the gauge for CWG Holdings Berhad's ROCE against it's prior returns. If you'd like to look at how CWG Holdings Berhad 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
There is reason to be cautious about CWG Holdings Berhad, given the returns are trending downwards. To be more specific, the ROCE was 10% five years ago, but since then it has dropped noticeably. Meanwhile, capital employed in the business has stayed roughly the flat over the period. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. If these trends continue, we wouldn't expect CWG Holdings Berhad to turn into a multi-bagger.
All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. Investors haven't taken kindly to these developments, since the stock has declined 31% from where it was five years ago. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.
CWG Holdings Berhad does have some risks, we noticed 2 warning signs (and 1 which is potentially serious) we think you should know about.
While CWG Holdings 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.
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Find out whether CWG Holdings Berhad is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.View the Free Analysis
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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.
CWG Holdings Berhad
CWG Holdings Berhad, an investment holding company, engages in the manufacture and sale of paper-based stationery and printing materials in Malaysia, Africa, the United States, Europe, Oceania, and rest of Asia.
Excellent balance sheet and slightly overvalued.