OPG Power Ventures (LON:OPG) Is Doing The Right Things To Multiply Its Share Price

There are a few key trends to look for if we want to identify the next multi-bagger. 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Speaking of which, we noticed some great changes in OPG Power Ventures' (LON:OPG) returns on capital, so let's have a look.

What is 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 OPG Power Ventures:

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

0.12 = UK£26m ÷ (UK£256m - UK£37m) (Based on the trailing twelve months to September 2020).

So, OPG Power Ventures has an ROCE of 12%. On its own, that's a standard return, however it's much better than the 6.6% generated by the Electric Utilities industry.

See our latest analysis for OPG Power Ventures

In the above chart we have measured OPG Power Ventures' 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 OPG Power Ventures here for free.

What Does the ROCE Trend For OPG Power Ventures Tell Us?

You'd find it hard not to be impressed with the ROCE trend at OPG Power Ventures. The data shows that returns on capital have increased by 31% over the trailing five years. The company is now earning UK£0.1 per dollar of capital employed. Speaking of capital employed, the company is actually utilizing 44% less than it was five years ago, which can be indicative of a business that's improving its efficiency. OPG Power Ventures may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.

The Bottom Line

In summary, it's great to see that OPG Power Ventures has been able to turn things around and earn higher returns on lower amounts of capital. However the stock is down a substantial 73% in the last five years so there could be other areas of the business hurting its prospects. In any case, we believe the economic trends of this company are positive and looking into the stock further could prove rewarding.

One more thing: We've identified 3 warning signs with OPG Power Ventures (at least 1 which is significant) , and understanding them would certainly be useful.

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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