Does Orapi (EPA:ORAP) Have The DNA Of A Multi-Bagger?

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. Speaking of which, we noticed some great changes in Orapi's (EPA:ORAP) returns on capital, so let's have a look.

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 Orapi is:

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

0.22 = €16m ÷ (€228m - €157m) (Based on the trailing twelve months to June 2020).

Therefore, Orapi has an ROCE of 22%. In absolute terms that's a great return and it's even better than the Chemicals industry average of 8.3%.

View our latest analysis for Orapi

In the above chart we have measured Orapi's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Orapi.

What Does the ROCE Trend For Orapi Tell Us?

You'd find it hard not to be impressed with the ROCE trend at Orapi. We found that the returns on capital employed over the last five years have risen by 423%. The company is now earning €0.2 per dollar of capital employed. In regards to capital employed, Orapi appears to been achieving more with less, since the business is using 34% less capital to run its operation. A business that's shrinking its asset base like this isn't usually typical of a soon to be multi-bagger company.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. The current liabilities has increased to 69% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.

In Conclusion...

In a nutshell, we're pleased to see that Orapi has been able to generate higher returns from less capital. Since the stock has only returned 10% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. So with that in mind, we think the stock deserves further research.

On a separate note, we've found 6 warning signs for Orapi you'll probably want to know about.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.

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