AWC Berhad (KLSE:AWC) may have problems allocating its capital

There are a few key trends to look out for if we want to identify the next multi-bagger. Among other things, we will want to see two things; first, growth come back on capital employed (ROCE) and on the other hand, an expansion of the amount capital employed. Simply put, these types of businesses are slot machines, meaning they continually reinvest their profits at ever-higher rates of return. However, after investigating AWC Berhad (KLSE:AWC), we don’t think current trends fit the mold of a multi-bagger.

Understanding return on capital employed (ROCE)

For those unaware, ROCE is a measure of a company’s annual pre-tax profit (yield), relative to the capital employed in the business. The formula for this calculation on AWC Berhad is:

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

0.16 = RM46m ÷ (RM412m – RM117m) (Based on the last twelve months to June 2022).

Thereby, AWC Berhad has a ROCE of 16%. In absolute terms, that’s a decent return, but compared to the construction industry average of 5.1%, it’s much better.

See our latest analysis for AWC Berhad


Above, you can see how AWC Berhad’s current ROCE compares to its past returns on capital, but you can’t say anything about the past. If you want, you can check out analyst forecasts covering AWC Berhad here for free.

What the ROCE trend can tell us

On the surface, the ROCE trend at AWC Berhad does not inspire confidence. To be more specific, ROCE has fallen by 22% over the past five years. However, it looks like AWC Berhad could reinvest for long-term growth because while capital employed has increased, the company’s sales have not changed much over the past 12 months. It may take some time before the company begins to see a change in the income from these investments.

On a related note, AWC Berhad reduced its current liabilities to 28% of total assets. This could partly explain why ROCE fell. Additionally, it may reduce some aspects of risk to the business, as the business’s suppliers or short-term creditors now fund less of its operations. Some would argue that this reduces the company’s effectiveness in generating a return on investment, as it now funds more of the operations with its own money.

The essentials of AWC Berhad’s ROCE

In summary, AWC Berhad is reinvesting funds into the business for growth, but unfortunately, it appears sales haven’t grown much yet. Given that the stock has fallen 53% in the past five years, investors may not be too optimistic that this trend is improving either. Overall, we’re not overly inspired by the underlying trends and think there may be a better chance of finding a multi-bagger elsewhere.

AWC Berhad comes with some risks though, and we spotted 2 warning signs for AWC Berhad that might interest you.

Although AWC Berhad does not generate the highest yield, check out this free list of companies that achieve high returns on equity with strong balance sheets.

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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

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