Wah Seong Corporation Berhad (KLSE:WASEONG) Might Have The Makings Of A Multi-Bagger

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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 when we looked at Wah Seong Corporation Berhad (KLSE:WASEONG) and its trend of ROCE, we really liked what we saw.

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 Wah Seong Corporation Berhad is:

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

0.027 = RM30m ÷ (RM2.2b - RM1.1b) (Based on the trailing twelve months to June 2021).

So, Wah Seong Corporation Berhad has an ROCE of 2.7%. Ultimately, that's a low return and it under-performs the Energy Services industry average of 8.0%.

See our latest analysis for Wah Seong Corporation Berhad

Above you can see how the current ROCE for Wah Seong Corporation Berhad compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Wah Seong Corporation Berhad here for free.

So How Is Wah Seong Corporation Berhad's ROCE Trending?

Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. We found that the returns on capital employed over the last five years have risen by 221%. The company is now earning RM0.03 per dollar of capital employed. Interestingly, the business may be becoming more efficient because it's applying 28% less capital than it was five years ago. Wah Seong Corporation Berhad may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.

On a side note, Wah Seong Corporation Berhad's current liabilities are still rather high at 51% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

In Conclusion...

In the end, Wah Seong Corporation Berhad has proven it's capital allocation skills are good with those higher returns from less amount of capital. And given the stock has remained rather flat over the last five years, there might be an opportunity here if other metrics are strong. So researching this company further and determining whether or not these trends will continue seems justified.

Like most companies, Wah Seong Corporation Berhad does come with some risks, and we've found 1 warning sign that you should be aware of.

While Wah Seong Corporation Berhad 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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