Capital Investments At Powerwell Holdings Berhad (KLSE:PWRWELL) Point To A Promising Future
Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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. That's why when we briefly looked at Powerwell Holdings Berhad's (KLSE:PWRWELL) ROCE trend, we were very happy with what we saw.
Our free stock report includes 3 warning signs investors should be aware of before investing in Powerwell Holdings Berhad. Read for free now.
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. To calculate this metric for Powerwell Holdings Berhad, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.25 = RM24m ÷ (RM183m - RM85m) (Based on the trailing twelve months to December 2024).
So, Powerwell Holdings Berhad has an ROCE of 25%. That's a fantastic return and not only that, it outpaces the average of 11% earned by companies in a similar industry.
See our latest analysis for Powerwell Holdings Berhad
Historical performance is a great place to start when researching a stock so above you can see the gauge for Powerwell Holdings Berhad's ROCE against it's prior returns. If you'd like to look at how Powerwell Holdings Berhad has performed in the past in other metrics, you can view this free graph of Powerwell Holdings Berhad's past earnings, revenue and cash flow.
Powerwell Holdings Berhad deserves to be commended in regards to it's returns. Over the past five years, ROCE has remained relatively flat at around 25% and the business has deployed 59% more capital into its operations. Returns like this are the envy of most businesses and given it has repeatedly reinvested at these rates, that's even better. You'll see this when looking at well operated businesses or favorable business models.
On another note, while the change in ROCE trend might not scream for attention, it's interesting that the current liabilities have actually gone up over the last five years. This is intriguing because if current liabilities hadn't increased to 46% of total assets, this reported ROCE would probably be less than25% because total capital employed would be higher.The 25% ROCE could be even lower if current liabilities weren't 46% of total assets, because the the formula would show a larger base of total capital employed. Additionally, this high level of current liabilities isn't ideal because it means the company's suppliers (or short-term creditors) are effectively funding a large portion of the business.
In summary, we're delighted to see that Powerwell Holdings Berhad has been compounding returns by reinvesting at consistently high rates of return, as these are common traits of a multi-bagger. And since the stock has risen strongly over the last five years, it appears the market might expect this trend to continue. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.
One more thing: We've identified 3 warning signs with Powerwell Holdings Berhad (at least 1 which is concerning) , and understanding these would certainly be useful.
If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.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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