Returns At OVH Groupe (EPA:OVH) Are On The Way Up

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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So when we looked at OVH Groupe (EPA:OVH) and its trend of ROCE, we really liked what we saw.

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

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on OVH Groupe is:

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

0.0076 = €8.4m ÷ (€1.4b - €339m) (Based on the trailing twelve months to August 2022).

Thus, OVH Groupe has an ROCE of 0.8%. Ultimately, that's a low return and it under-performs the IT industry average of 14%.

See our latest analysis for OVH Groupe

In the above chart we have measured OVH Groupe'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 OVH Groupe here for free.

What Does the ROCE Trend For OVH Groupe Tell Us?

The fact that OVH Groupe is now generating some pre-tax profits from its prior investments is very encouraging. About four years ago the company was generating losses but things have turned around because it's now earning 0.8% on its capital. In addition to that, OVH Groupe is employing 67% more capital than previously which is expected of a company that's trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

What We Can Learn From OVH Groupe's ROCE

To the delight of most shareholders, OVH Groupe has now broken into profitability. Astute investors may have an opportunity here because the stock has declined 54% in the last year. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

If you'd like to know more about OVH Groupe, we've spotted 2 warning signs, and 1 of them shouldn't be ignored.

While OVH Groupe 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.