Will The ROCE Trend At Oriental Trimex (NSE:ORIENTALTL) Continue?

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. Speaking of which, we noticed some great changes in Oriental Trimex's (NSE:ORIENTALTL) returns on capital, so let's have a look.

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

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Oriental Trimex, this is the formula:

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

0.066 = ₹68m ÷ (₹1.4b - ₹375m) (Based on the trailing twelve months to September 2020).

Thus, Oriental Trimex has an ROCE of 6.6%. Ultimately, that's a low return and it under-performs the Basic Materials industry average of 10.0%.

View our latest analysis for Oriental Trimex

Historical performance is a great place to start when researching a stock so above you can see the gauge for Oriental Trimex's ROCE against it's prior returns. If you're interested in investigating Oriental Trimex's past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From Oriental Trimex's ROCE Trend?

We're delighted to see that Oriental Trimex is reaping rewards from its investments and is now generating some pre-tax profits. The company was generating losses five years ago, but now it's earning 6.6% which is a sight for sore eyes. In addition to that, Oriental Trimex is employing 161% more capital than previously which is expected of a company that's trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

On a related note, the company's ratio of current liabilities to total assets has decreased to 27%, which basically reduces it's funding from the likes of short-term creditors or suppliers. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books.

The Bottom Line On Oriental Trimex's ROCE

Overall, Oriental Trimex gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. And a remarkable 267% 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.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for Oriental Trimex (of which 1 is a bit unpleasant!) that you should know about.

While Oriental Trimex 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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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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