Yahoo Finance WMG Holdings Bhd (KLSE:WMG) Might Have The Makings Of A Multi-Bagger
There are a few key trends to look for if we want to identify the next multi-bagger. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. With that in mind, we've noticed some promising trends at WMG Holdings Bhd (KLSE:WMG) so let's look a bit deeper.
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 WMG Holdings Bhd is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.057 = RM14m ÷ (RM411m - RM166m) (Based on the trailing twelve months to March 2024).
Thus, WMG Holdings Bhd has an ROCE of 5.7%. In absolute terms, that's a low return and it also under-performs the Trade Distributors industry average of 9.3%.
See our latest analysis for WMG Holdings Bhd
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how WMG Holdings Bhd has performed in the past in other metrics, you can view this free graph of WMG Holdings Bhd's past earnings, revenue and cash flow.
What The Trend Of ROCE Can Tell Us
We're delighted to see that WMG Holdings Bhd is reaping rewards from its investments and has now broken into profitability. While the business was unprofitable in the past, it's now turned things around and is earning 5.7% on its capital. While returns have increased, the amount of capital employed by WMG Holdings Bhd has remained flat over the period. So while we're happy that the business is more efficient, just keep in mind that could mean that going forward the business is lacking areas to invest internally for growth. Because in the end, a business can only get so efficient.
Another thing to note, WMG Holdings Bhd has a high ratio of current liabilities to total assets of 40%. 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.
The Bottom Line On WMG Holdings Bhd's ROCE
As discussed above, WMG Holdings Bhd appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. And a remarkable 345% total return over the last five years tells us that investors are expecting more good things to come in the future. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.
One more thing: We've identified 2 warning signs with WMG Holdings Bhd (at least 1 which is potentially serious) , and understanding these would certainly be useful.
While WMG Holdings Bhd 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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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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com
