The Trends At Willowglen MSC Berhad (KLSE:WILLOW) That You Should Know About

To find a multi-bagger stock, what are the underlying trends we should look for in a business? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. In light of that, when we looked at Willowglen MSC Berhad (KLSE:WILLOW) and its ROCE trend, we weren't exactly thrilled.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed 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)

0.059 = RM11m ÷ (RM211m - RM34m) (Based on the trailing twelve months to December 2020).

Therefore, Willowglen MSC Berhad has an ROCE of 5.9%. In absolute terms, that's a low return and it also 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 want to delve into the historical earnings, revenue and cash flow of Willowglen MSC Berhad, check out these free graphs here.

What Does the ROCE Trend For Willowglen MSC Berhad Tell Us?

In terms of Willowglen MSC Berhad's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 5.9% from 17% five years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

The Bottom Line On Willowglen MSC Berhad's ROCE

Bringing it all together, while we're somewhat encouraged by Willowglen MSC Berhad's reinvestment in its own business, we're aware that returns are shrinking. Although the market must be expecting these trends to improve because the stock has gained 54% over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

Willowglen MSC Berhad does have some risks, we noticed 3 warning signs (and 1 which is potentially serious) we think you should know about.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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