Orient Ceratech (NSE:ORIENTCER) Is Reinvesting At Lower Rates Of Return

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. However, after briefly looking over the numbers, we don't think Orient Ceratech (NSE:ORIENTCER) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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 Orient Ceratech:

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

0.088 = ₹250m ÷ (₹3.9b - ₹1.1b) (Based on the trailing twelve months to December 2023).

Thus, Orient Ceratech has an ROCE of 8.8%. Ultimately, that's a low return and it under-performs the Metals and Mining industry average of 15%.

Check out our latest analysis for Orient Ceratech

Historical performance is a great place to start when researching a stock so above you can see the gauge for Orient Ceratech's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Orient Ceratech.

What Can We Tell From Orient Ceratech's ROCE Trend?

When we looked at the ROCE trend at Orient Ceratech, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 8.8% from 13% five years ago. However it looks like Orient Ceratech 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 Orient Ceratech's ROCE

Bringing it all together, while we're somewhat encouraged by Orient Ceratech's reinvestment in its own business, we're aware that returns are shrinking. Since the stock has gained an impressive 93% over the last five years, investors must think there's better things to come. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

If you'd like to know more about Orient Ceratech, we've spotted 3 warning signs, and 1 of them is concerning.

While Orient Ceratech 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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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.