Orient Abrasives (NSE:ORIENTABRA) Is Reinvesting At Lower Rates Of Return

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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. Having said that, from a first glance at Orient Abrasives (NSE:ORIENTABRA) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Orient Abrasives is:

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

0.06 = ₹155m ÷ (₹3.7b - ₹1.1b) (Based on the trailing twelve months to September 2021).

Thus, Orient Abrasives has an ROCE of 6.0%. Ultimately, that's a low return and it under-performs the Metals and Mining industry average of 16%.

Check out our latest analysis for Orient Abrasives

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

What Can We Tell From Orient Abrasives' ROCE Trend?

On the surface, the trend of ROCE at Orient Abrasives doesn't inspire confidence. Around five years ago the returns on capital were 15%, but since then they've fallen to 6.0%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

What We Can Learn From Orient Abrasives' ROCE

To conclude, we've found that Orient Abrasives is reinvesting in the business, but returns have been falling. Unsurprisingly, the stock has only gained 1.9% over the last five years, which potentially indicates that investors are accounting for this going forward. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

On a separate note, we've found 3 warning signs for Orient Abrasives you'll probably want to know about.

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.