Is Ontex Group (EBR:ONTEX) Likely To Turn Things Around?

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Having said that, from a first glance at Ontex Group (EBR:ONTEX) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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. To calculate this metric for Ontex Group, this is the formula:

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

0.081 = €168m ÷ (€3.1b - €991m) (Based on the trailing twelve months to June 2020).

So, Ontex Group has an ROCE of 8.1%. On its own, that's a low figure but it's around the 9.5% average generated by the Personal Products industry.

Check out our latest analysis for Ontex Group

Above you can see how the current ROCE for Ontex Group compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Ontex Group here for free.

What Does the ROCE Trend For Ontex Group Tell Us?

On the surface, the trend of ROCE at Ontex Group doesn't inspire confidence. Around five years ago the returns on capital were 13%, but since then they've fallen to 8.1%. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. 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.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 32%, which has impacted the ROCE. Without this increase, it's likely that ROCE would be even lower than 8.1%. Keep an eye on this ratio, because the business could encounter some new risks if this metric gets too high.

The Key Takeaway

In summary, Ontex Group is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And investors may be expecting the fundamentals to get a lot worse because the stock has crashed 71% over the last five years. Therefore based on the analysis done in this article, we don't think Ontex Group has the makings of a multi-bagger.

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

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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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