Obrascón Huarte Lain (BME:OHLA) Shareholders Will Want The ROCE Trajectory To Continue

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So on that note, Obrascón Huarte Lain (BME:OHLA) looks quite promising in regards to its trends of return on capital.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Obrascón Huarte Lain is:

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

0.038 = €46m ÷ (€3.2b - €2.0b) (Based on the trailing twelve months to December 2022).

So, Obrascón Huarte Lain has an ROCE of 3.8%. Ultimately, that's a low return and it under-performs the Construction industry average of 7.1%.

View our latest analysis for Obrascón Huarte Lain

In the above chart we have measured Obrascón Huarte Lain'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 Obrascón Huarte Lain here for free.

The Trend Of ROCE

Like most people, we're pleased that Obrascón Huarte Lain is now generating some pretax earnings. The company was generating losses five years ago, but now it's turned around, earning 3.8% which is no doubt a relief for some early shareholders. Additionally, the business is utilizing 77% less capital than it was five years ago, and taken at face value, that can mean the company needs less funds at work to get a return. Obrascón Huarte Lain could be selling under-performing assets since the ROCE is improving.

On a side note, Obrascón Huarte Lain's current liabilities are still rather high at 62% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

Our Take On Obrascón Huarte Lain's ROCE

In the end, Obrascón Huarte Lain has proven it's capital allocation skills are good with those higher returns from less amount of capital. Although the company may be facing some issues elsewhere since the stock has plunged 80% in the last five years. Regardless, we think the underlying fundamentals warrant this stock for further investigation.

Obrascón Huarte Lain does have some risks though, and we've spotted 1 warning sign for Obrascón Huarte Lain that you might be interested in.

While Obrascón Huarte Lain isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.