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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. With that in mind, we've noticed some promising trends at OM Holdings (ASX:OMH) so let's look a bit deeper.
What is Return On Capital Employed (ROCE)?
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. The formula for this calculation on OM Holdings is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.0064 = AU$5.3m ÷ (AU$1.1b - AU$299m) (Based on the trailing twelve months to December 2020).
Therefore, OM Holdings has an ROCE of 0.6%. In absolute terms, that's a low return and it also under-performs the Metals and Mining industry average of 9.5%.
Historical performance is a great place to start when researching a stock so above you can see the gauge for OM Holdings' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of OM Holdings, check out these free graphs here.
How Are Returns Trending?
Shareholders will be relieved that OM Holdings has broken into profitability. The company now earns 0.6% on its capital, because five years ago it was incurring losses. On top of that, what's interesting is that the amount of capital being employed has remained steady, so the business hasn't needed to put any additional money to work to generate these higher returns. So while we're happy that the business is more efficient, just keep in mind that could mean that going forward the business is lacking areas to invest internally for growth. Because in the end, a business can only get so efficient.
The Bottom Line
In summary, we're delighted to see that OM Holdings has been able to increase efficiencies and earn higher rates of return on the same amount of capital. Since the stock has returned a staggering 622% to shareholders over the last five years, it looks like investors are recognizing these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.
One more thing: We've identified 2 warning signs with OM Holdings (at least 1 which can't be ignored) , and understanding these would certainly be useful.
While OM Holdings 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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