There Are Reasons To Feel Uneasy About Omnibridge Holdings' (HKG:8462) Returns On Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at Omnibridge Holdings (HKG:8462) and its ROCE trend, we weren't exactly thrilled.

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 Omnibridge Holdings is:

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

0.033 = S$549k ÷ (S$32m - S$15m) (Based on the trailing twelve months to March 2021).

So, Omnibridge Holdings has an ROCE of 3.3%. Ultimately, that's a low return and it under-performs the Professional Services industry average of 4.8%.

View our latest analysis for Omnibridge Holdings

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

So How Is Omnibridge Holdings' ROCE Trending?

When we looked at the ROCE trend at Omnibridge Holdings, we didn't gain much confidence. Around five years ago the returns on capital were 21%, but since then they've fallen to 3.3%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 47%, which has impacted the ROCE. Without this increase, it's likely that ROCE would be even lower than 3.3%. What this means is that in reality, a rather large portion of the business is being funded by the likes of the company's suppliers or short-term creditors, which can bring some risks of its own.

Our Take On Omnibridge Holdings' ROCE

While returns have fallen for Omnibridge Holdings in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. Despite these promising trends, the stock has collapsed 92% over the last three years, so there could be other factors hurting the company's prospects. Regardless, reinvestment can pay off in the long run, so we think astute investors may want to look further into this stock.

One more thing, we've spotted 3 warning signs facing Omnibridge Holdings that you might find interesting.

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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