Is Oricon Enterprises (NSE:ORICONENT) Set To Make A Turnaround?

To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. And from a first read, things don't look too good at Oricon Enterprises (NSE:ORICONENT), so let's see why.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Oricon Enterprises, this is the formula:

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

0.0061 = ₹70m ÷ (₹15b - ₹3.5b) (Based on the trailing twelve months to March 2020).

Therefore, Oricon Enterprises has an ROCE of 0.6%. In absolute terms, that's a low return and it also under-performs the Shipping industry average of 4.0%.

See our latest analysis for Oricon Enterprises

Historical performance is a great place to start when researching a stock so above you can see the gauge for Oricon Enterprises' ROCE against it's prior returns. If you'd like to look at how Oricon Enterprises has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

There is reason to be cautious about Oricon Enterprises, given the returns are trending downwards. About five years ago, returns on capital were 5.5%, however they're now substantially lower than that as we saw above. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. If these trends continue, we wouldn't expect Oricon Enterprises to turn into a multi-bagger.

The Bottom Line On Oricon Enterprises' ROCE

In summary, it's unfortunate that Oricon Enterprises is generating lower returns from the same amount of capital. Long term shareholders who've owned the stock over the last five years have experienced a 47% depreciation in their investment, so it appears the market might not like these trends either. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

If you want to continue researching Oricon Enterprises, you might be interested to know about the 3 warning signs that our analysis has discovered.

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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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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