Will The ROCE Trend At OPG Power Ventures (LON:OPG) Continue?

To find a multi-bagger stock, what are the underlying trends we should look for in a business? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in OPG Power Ventures' (LON:OPG) returns on capital, so let's have a look.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the 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)

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

Thus, OPG Power Ventures has an ROCE of 12%. In absolute terms, that's a satisfactory return, but compared to the Electric Utilities industry average of 6.6% it's much better.

Check out 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're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

So How Is OPG Power Ventures' ROCE Trending?

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. 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

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. However the stock is down a substantial 82% in the last five years so there could be other areas of the business hurting its prospects. Regardless, we think the underlying fundamentals warrant this stock for further investigation.

OPG Power Ventures does have some risks, we noticed 3 warning signs (and 1 which is concerning) we think you should know about.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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