Returns At OPG Power Ventures (LON:OPG) Are On The Way Up

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. 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. Speaking of which, we noticed some great changes in OPG Power Ventures' (LON:OPG) returns on capital, so let's have a look.

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. 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)

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

Therefore, 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 9.2%.

View 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 to see what analysts are forecasting going forward, you should check out our free report for OPG Power Ventures.

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. We found that the returns on capital employed over the last five years have risen by 29%. That's a very favorable trend because this means that the company is earning more per dollar of capital that's being employed. 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 Bottom Line On OPG Power Ventures' ROCE

In the end, OPG Power Ventures has proven it's capital allocation skills are good with those higher returns from less amount of capital. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 8.8% to shareholders. So with that in mind, we think the stock deserves further research.

OPG Power Ventures does come with some risks though, we found 4 warning signs in our investment analysis, and 1 of those is potentially serious...

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.