Capital Allocation Trends At Oriental Aromatics (NSE:OAL) Aren't Ideal

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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 Oriental Aromatics (NSE:OAL) and its ROCE trend, we weren't exactly thrilled.

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 Oriental Aromatics is:

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

0.09 = ₹658m ÷ (₹11b - ₹3.3b) (Based on the trailing twelve months to September 2024).

Therefore, Oriental Aromatics has an ROCE of 9.0%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 13%.

Check out our latest analysis for Oriental Aromatics

Historical performance is a great place to start when researching a stock so above you can see the gauge for Oriental Aromatics' ROCE against it's prior returns. If you'd like to look at how Oriental Aromatics has performed in the past in other metrics, you can view this free graph of Oriental Aromatics' past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

In terms of Oriental Aromatics' historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 22% over the last five years. However it looks like Oriental Aromatics might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

What We Can Learn From Oriental Aromatics' ROCE

To conclude, we've found that Oriental Aromatics is reinvesting in the business, but returns have been falling. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 173% gain to shareholders who have held over the last five years. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

On a final note, we found 2 warning signs for Oriental Aromatics (1 is concerning) you should be aware of.

While Oriental Aromatics 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.