Capital Allocation Trends At Oil Refineries (TLV:ORL) Aren't Ideal

When researching a stock for investment, what can tell us that the company is in decline? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. And from a first read, things don't look too good at Oil Refineries (TLV:ORL), so let's see why.

Return On Capital Employed (ROCE): What is it?

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 Oil Refineries is:

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

0.021 = US$58m ÷ (US$4.2b - US$1.4b) (Based on the trailing twelve months to March 2021).

So, Oil Refineries has an ROCE of 2.1%. In absolute terms, that's a low return and it also under-performs the Oil and Gas industry average of 13%.

View our latest analysis for Oil Refineries

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, revenue and cash flow of Oil Refineries, check out these free graphs here.

What Does the ROCE Trend For Oil Refineries Tell Us?

We are a bit worried about the trend of returns on capital at Oil Refineries. About five years ago, returns on capital were 15%, however they're now substantially lower than that as we saw above. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Oil Refineries becoming one if things continue as they have.

Our Take On Oil Refineries' ROCE

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. Investors haven't taken kindly to these developments, since the stock has declined 33% from where it was five years ago. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

One more thing, we've spotted 2 warning signs facing Oil Refineries that you might find interesting.

While Oil Refineries may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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