There are a few key trends to look for if we want to identify the next multi-bagger. 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. So on that note, Oriental Press Group (HKG:18) looks quite promising in regards to its trends of return on capital.
What is Return On Capital Employed (ROCE)?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Oriental Press Group:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.02 = HK$38m ÷ (HK$2.0b - HK$119m) (Based on the trailing twelve months to September 2020).
Therefore, Oriental Press Group has an ROCE of 2.0%. In absolute terms, that's a low return and it also under-performs the Media industry average of 11%.
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're interested in investigating Oriental Press Group's past further, check out this free graph of past earnings, revenue and cash flow.
What Does the ROCE Trend For Oriental Press Group Tell Us?
It's nice to see that ROCE is headed in the right direction, even if it is still relatively low. The figures show that over the last five years, returns on capital have grown by 108%. That's not bad because this tells for every dollar invested (capital employed), the company is increasing the amount earned from that dollar. Interestingly, the business may be becoming more efficient because it's applying 35% less capital than it was five years ago. If this trend continues, the business might be getting more efficient but it's shrinking in terms of total assets.
Our Take On Oriental Press Group's ROCE
In a nutshell, we're pleased to see that Oriental Press Group has been able to generate higher returns from less capital. And since the stock has fallen 10% over the last five years, there might be an opportunity here. So researching this company further and determining whether or not these trends will continue seems justified.
If you'd like to know more about Oriental Press Group, we've spotted 4 warning signs, and 1 of them is a bit concerning.
While Oriental Press Group 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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