Returns On Capital At Orinko Advanced PlasticsLTD (SHSE:688219) Paint A Concerning Picture

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Orinko Advanced PlasticsLTD (SHSE:688219) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Orinko Advanced PlasticsLTD, this is the formula:

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

0.076 = CN¥267m ÷ (CN¥6.9b - CN¥3.3b) (Based on the trailing twelve months to September 2024).

Thus, Orinko Advanced PlasticsLTD has an ROCE of 7.6%. On its own that's a low return, but compared to the average of 5.5% generated by the Chemicals industry, it's much better.

Check out our latest analysis for Orinko Advanced PlasticsLTD

Historical performance is a great place to start when researching a stock so above you can see the gauge for Orinko Advanced PlasticsLTD's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Orinko Advanced PlasticsLTD.

What Does the ROCE Trend For Orinko Advanced PlasticsLTD Tell Us?

In terms of Orinko Advanced PlasticsLTD's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 7.6% from 11% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

On a side note, Orinko Advanced PlasticsLTD has done well to pay down its current liabilities to 49% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE. Keep in mind 49% is still pretty high, so those risks are still somewhat prevalent.

The Bottom Line On Orinko Advanced PlasticsLTD's ROCE

To conclude, we've found that Orinko Advanced PlasticsLTD is reinvesting in the business, but returns have been falling. Since the stock has declined 17% over the last three years, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don't think Orinko Advanced PlasticsLTD has the makings of a multi-bagger.

One more thing: We've identified 2 warning signs with Orinko Advanced PlasticsLTD (at least 1 which makes us a bit uncomfortable) , and understanding these would certainly be useful.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.