Orissa Bengal Carrier's (NSE:OBCL) Returns On Capital Not Reflecting Well On The Business

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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 Orissa Bengal Carrier (NSE:OBCL) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Return On Capital Employed (ROCE): What Is It?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Orissa Bengal Carrier:

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

0.073 = ₹64m ÷ (₹984m - ₹113m) (Based on the trailing twelve months to March 2023).

Thus, Orissa Bengal Carrier has an ROCE of 7.3%. In absolute terms, that's a low return and it also under-performs the Transportation industry average of 13%.

See our latest analysis for Orissa Bengal Carrier

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

The Trend Of ROCE

When we looked at the ROCE trend at Orissa Bengal Carrier, we didn't gain much confidence. To be more specific, ROCE has fallen from 22% over the last five years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

On a related note, Orissa Bengal Carrier has decreased its current liabilities to 12% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

In Conclusion...

In summary, despite lower returns in the short term, we're encouraged to see that Orissa Bengal Carrier is reinvesting for growth and has higher sales as a result. These growth trends haven't led to growth returns though, since the stock has fallen 52% over the last year. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

On a final note, we found 4 warning signs for Orissa Bengal Carrier (2 can't be ignored) you should be aware of.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.