Investors Could Be Concerned With Ocean Wilsons Holdings' (LON:OCN) Returns On Capital

What financial metrics can indicate to us that a company is maturing or even in decline? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. This indicates the company is producing less profit from its investments and its total assets are decreasing. So after we looked into Ocean Wilsons Holdings (LON:OCN), the trends above didn't look too great.

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 Ocean Wilsons Holdings:

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

0.061 = US$74m ÷ (US$1.4b - US$124m) (Based on the trailing twelve months to December 2020).

So, Ocean Wilsons Holdings has an ROCE of 6.1%. On its own, that's a low figure but it's around the 7.1% average generated by the Infrastructure industry.

See our latest analysis for Ocean Wilsons Holdings

Above you can see how the current ROCE for Ocean Wilsons Holdings compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Ocean Wilsons Holdings here for free.

The Trend Of ROCE

There is reason to be cautious about Ocean Wilsons Holdings, given the returns are trending downwards. About five years ago, returns on capital were 10%, however they're now substantially lower than that as we saw above. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. If these trends continue, we wouldn't expect Ocean Wilsons Holdings to turn into a multi-bagger.

In Conclusion...

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. However the stock has delivered a 53% return to shareholders over the last five years, so investors might be expecting the trends to turn around. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

If you'd like to know about the risks facing Ocean Wilsons Holdings, we've discovered 3 warning signs that you should be aware of.

While Ocean Wilsons Holdings may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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