Orient Victory Smart urban Services Holding's (HKG:265) Returns On Capital Are Heading Higher

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, we've noticed some promising trends at Orient Victory Smart urban Services Holding (HKG:265) so let's look a bit deeper.

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. To calculate this metric for Orient Victory Smart urban Services Holding, this is the formula:

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

0.06 = HK$40m ÷ (HK$808m - HK$142m) (Based on the trailing twelve months to June 2023).

So, Orient Victory Smart urban Services Holding has an ROCE of 6.0%. In absolute terms, that's a low return, but it's much better than the Hospitality industry average of 3.8%.

See our latest analysis for Orient Victory Smart urban Services Holding

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Orient Victory Smart urban Services Holding.

How Are Returns Trending?

Shareholders will be relieved that Orient Victory Smart urban Services Holding has broken into profitability. The company now earns 6.0% on its capital, because five years ago it was incurring losses. While returns have increased, the amount of capital employed by Orient Victory Smart urban Services Holding has remained flat over the period. So while we're happy that the business is more efficient, just keep in mind that could mean that going forward the business is lacking areas to invest internally for growth. Because in the end, a business can only get so efficient.

The Bottom Line On Orient Victory Smart urban Services Holding's ROCE

As discussed above, Orient Victory Smart urban Services Holding appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. And since the stock has dived 84% over the last five years, there may be other factors affecting the company's prospects. Regardless, we think the underlying fundamentals warrant this stock for further investigation.

On a final note, we found 2 warning signs for Orient Victory Smart urban Services Holding (1 is a bit unpleasant) you should be aware of.

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. 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.