Orascom Development Holding's (VTX:ODHN) Returns On Capital Not Reflecting Well On The Business

What underlying fundamental trends can indicate that a company might be in decline? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. This reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. On that note, looking into Orascom Development Holding (VTX:ODHN), we weren't too upbeat about how things were going.

Understanding Return On Capital Employed (ROCE)

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. Analysts use this formula to calculate it for Orascom Development Holding:

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

0.014 = CHF19m ÷ (CHF1.8b - CHF457m) (Based on the trailing twelve months to December 2020).

Therefore, Orascom Development Holding has an ROCE of 1.4%. In absolute terms, that's a low return and it also under-performs the Hospitality industry average of 6.7%.

See our latest analysis for Orascom Development Holding

Above you can see how the current ROCE for Orascom Development Holding compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Orascom Development Holding.

How Are Returns Trending?

There is reason to be cautious about Orascom Development Holding, given the returns are trending downwards. About five years ago, returns on capital were 2.5%, however they're now substantially lower than that as we saw above. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Orascom Development Holding becoming one if things continue as they have.

In Conclusion...

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. Despite the concerning underlying trends, the stock has actually gained 24% over the last five years, so it might be that the investors are expecting the trends to reverse. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

If you're still interested in Orascom Development Holding it's worth checking out our FREE intrinsic value approximation to see if it's trading at an attractive price in other respects.

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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