Wang-Zheng Berhad (KLSE:WANGZNG) Will Be Looking To Turn Around Its Returns

When researching a stock for investment, what can tell us that the company is in decline? When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. So after we looked into Wang-Zheng Berhad (KLSE:WANGZNG), the trends above didn't look too great.

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. To calculate this metric for Wang-Zheng Berhad, this is the formula:

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

0.04 = RM8.0m ÷ (RM268m - RM65m) (Based on the trailing twelve months to December 2020).

Thus, Wang-Zheng Berhad has an ROCE of 4.0%. In absolute terms, that's a low return, but it's much better than the Forestry industry average of 3.2%.

See our latest analysis for Wang-Zheng Berhad

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

How Are Returns Trending?

There is reason to be cautious about Wang-Zheng Berhad, given the returns are trending downwards. Unfortunately the returns on capital have diminished from the 5.7% that they were earning five years ago. 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. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Wang-Zheng Berhad becoming one if things continue as they have.

Our Take On Wang-Zheng Berhad's ROCE

In summary, it's unfortunate that Wang-Zheng Berhad is generating lower returns from the same amount of capital. Yet despite these concerning fundamentals, the stock has performed strongly with a 42% return over the last five years, so investors appear very optimistic. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

Wang-Zheng Berhad does have some risks, we noticed 4 warning signs (and 1 which shouldn't be ignored) we think you should know about.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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This article by Simply Wall St is general in nature. 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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