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

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. 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. With that in mind, we've noticed some promising trends at OPG Power Ventures (LON:OPG) so let's look a bit deeper.

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. The formula for this calculation on OPG Power Ventures is:

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

0.055 = UK£11m ÷ (UK£281m - UK£73m) (Based on the trailing twelve months to September 2022).

Thus, OPG Power Ventures has an ROCE of 5.5%. Ultimately, that's a low return and it under-performs the Electric Utilities industry average of 9.0%.

See our latest analysis for OPG Power Ventures

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

SWOT Analysis for OPG Power Ventures

What The Trend Of ROCE Can Tell Us

OPG Power Ventures has not disappointed in regards to ROCE growth. The data shows that returns on capital have increased by 29% over the trailing five years. That's not bad because this tells for every dollar invested (capital employed), the company is increasing the amount earned from that dollar. Speaking of capital employed, the company is actually utilizing 55% less than it was five years ago, which can be indicative of a business that's improving its efficiency. A business that's shrinking its asset base like this isn't usually typical of a soon to be multi-bagger company.

The Key Takeaway

From what we've seen above, OPG Power Ventures has managed to increase it's returns on capital all the while reducing it's capital base. Given the stock has declined 44% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

On a final note, we found 2 warning signs for OPG Power Ventures (1 is a bit concerning) you should be aware of.

While OPG Power Ventures 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.