The Returns At Willowglen MSC Berhad (KLSE:WILLOW) Provide Us With Signs Of What's To Come

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. However, after investigating Willowglen MSC Berhad (KLSE:WILLOW), we don't think it's current trends fit the mold of a multi-bagger.

What is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Willowglen MSC Berhad:

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

0.054 = RM9.1m ÷ (RM182m - RM14m) (Based on the trailing twelve months to September 2020).

Therefore, Willowglen MSC Berhad has an ROCE of 5.4%. Ultimately, that's a low return and it under-performs the Software industry average of 10%.

Check out our latest analysis for Willowglen MSC Berhad

Historical performance is a great place to start when researching a stock so above you can see the gauge for Willowglen MSC Berhad's ROCE against it's prior returns. If you're interested in investigating Willowglen MSC Berhad's past further, check out this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at Willowglen MSC Berhad doesn't inspire confidence. To be more specific, ROCE has fallen from 16% over the last five years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

The Key Takeaway

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Willowglen MSC Berhad. In light of this, the stock has only gained 36% over the last five years. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.

If you'd like to know more about Willowglen MSC Berhad, we've spotted 4 warning signs, and 1 of them is concerning.

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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