Orpea (EPA:ORP) Might Be Having Difficulty Using Its Capital Effectively

There are a few key trends to look for if we want to identify the next multi-bagger. 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Orpea (EPA:ORP), it didn't seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

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. The formula for this calculation on Orpea is:

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

0.025 = €392m ÷ (€19b - €3.5b) (Based on the trailing twelve months to December 2021).

So, Orpea has an ROCE of 2.5%. In absolute terms, that's a low return and it also under-performs the Healthcare industry average of 6.0%.

Check out our latest analysis for Orpea

Above you can see how the current ROCE for Orpea 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 Orpea.

How Are Returns Trending?

In terms of Orpea's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 2.5% from 5.0% five years ago. However it looks like Orpea might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

In Conclusion...

Bringing it all together, while we're somewhat encouraged by Orpea's reinvestment in its own business, we're aware that returns are shrinking. It seems that investors have little hope of these trends getting any better and that may have partly contributed to the stock collapsing 74% in the last five years. Therefore based on the analysis done in this article, we don't think Orpea has the makings of a multi-bagger.

One final note, you should learn about the 5 warning signs we've spotted with Orpea (including 2 which are significant) .

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.