The Returns At Orient Abrasives (NSE:ORIENTABRA) Provide Us With Signs Of What's To Come

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Orient Abrasives (NSE:ORIENTABRA), we don't think it's current trends fit the mold of a multi-bagger.

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

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. Analysts use this formula to calculate it for Orient Abrasives:

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

0.10 = ₹251m ÷ (₹3.5b - ₹964m) (Based on the trailing twelve months to June 2020).

Therefore, Orient Abrasives has an ROCE of 10.0%. Even though it's in line with the industry average of 9.8%, it's still a low return by itself.

View our latest analysis for Orient Abrasives

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're interested in investigating Orient Abrasives' past further, check out this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

On the surface, the trend of ROCE at Orient Abrasives doesn't inspire confidence. To be more specific, ROCE has fallen from 14% over the last five years. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. 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.

In Conclusion...

In summary, Orient Abrasives is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Since the stock has declined 39% over the last five years, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don't think Orient Abrasives has the makings of a multi-bagger.

One more thing, we've spotted 2 warning signs facing Orient Abrasives that you might find interesting.

While Orient Abrasives isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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