Is Osmozis (EPA:ALOSM) Likely To Turn Things Around?

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. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at Osmozis (EPA:ALOSM) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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. Analysts use this formula to calculate it for Osmozis:

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

0.026 = €529k ÷ (€24m - €3.3m) (Based on the trailing twelve months to February 2020).

Thus, Osmozis has an ROCE of 2.6%. In absolute terms, that's a low return and it also under-performs the Communications industry average of 7.3%.

See our latest analysis for Osmozis

Historical performance is a great place to start when researching a stock so above you can see the gauge for Osmozis' ROCE against it's prior returns. If you're interested in investigating Osmozis' past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Osmozis Tell Us?

Unfortunately, the trend isn't great with ROCE falling from 8.7% four years ago, while capital employed has grown 170%. That being said, Osmozis raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. It's unlikely that all of the funds raised have been put to work yet, so as a consequence Osmozis might not have received a full period of earnings contribution from it.

The Key Takeaway

In summary, despite lower returns in the short term, we're encouraged to see that Osmozis is reinvesting for growth and has higher sales as a result. And there could be an opportunity here if other metrics look good too, because the stock has declined 28% in the last three years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

If you want to know some of the risks facing Osmozis we've found 3 warning signs (1 is potentially serious!) that you should be aware of before investing here.

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. 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.
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