Ontex Group's (EBR:ONTEX) Returns Have Hit A Wall

What are the early trends we should look for to identify a stock that could multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. However, after investigating Ontex Group (EBR:ONTEX), we don't think it's current trends fit the mold of a multi-bagger.

Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Ontex Group:

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

0.081 = €133m ÷ (€2.4b - €740m) (Based on the trailing twelve months to June 2024).

So, Ontex Group has an ROCE of 8.1%. Ultimately, that's a low return and it under-performs the Personal Products industry average of 12%.

See our latest analysis for Ontex Group

In the above chart we have measured Ontex Group's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Ontex Group for free.

So How Is Ontex Group's ROCE Trending?

Over the past five years, Ontex Group's ROCE has remained relatively flat while the business is using 25% less capital than before. To us that doesn't look like a multi-bagger because the company appears to be selling assets and it's returns aren't increasing. In addition to that, since the ROCE doesn't scream "quality" at 8.1%, it's hard to get excited about these developments.

The Bottom Line On Ontex Group's ROCE

It's a shame to see that Ontex Group is effectively shrinking in terms of its capital base. And in the last five years, the stock has given away 40% so the market doesn't look too hopeful on these trends strengthening any time soon. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

One more thing to note, we've identified 2 warning signs with Ontex Group and understanding these should be part of your investment process.

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. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.