We're Watching These Trends At ORBIS (ETR:OBS)

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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 ORBIS (ETR:OBS) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What is 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 ORBIS:

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

0.082 = €3.8m ÷ (€69m - €23m) (Based on the trailing twelve months to June 2020).

Therefore, ORBIS has an ROCE of 8.2%. On its own, that's a low figure but it's around the 8.6% average generated by the IT industry.

Check out our latest analysis for ORBIS

Above you can see how the current ROCE for ORBIS 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 ORBIS here for free.

What Can We Tell From ORBIS' ROCE Trend?

In terms of ORBIS' historical ROCE trend, it doesn't exactly demand attention. The company has employed 90% more capital in the last five years, and the returns on that capital have remained stable at 8.2%. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

What We Can Learn From ORBIS' ROCE

In conclusion, ORBIS has been investing more capital into the business, but returns on that capital haven't increased. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 119% gain to shareholders who have held over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

One more thing: We've identified 3 warning signs with ORBIS (at least 1 which doesn't sit too well with us) , 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.

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