Can Oriental Consultants Holdings (TYO:2498) Continue To Grow Its Returns On Capital?

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So on that note, Oriental Consultants Holdings (TYO:2498) looks quite promising in regards to its trends of return on capital.

What is Return On Capital Employed (ROCE)?

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 Consultants Holdings is:

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

0.20 = JP¥2.7b ÷ (JP¥48b - JP¥34b) (Based on the trailing twelve months to September 2020).

Therefore, Oriental Consultants Holdings has an ROCE of 20%. On its own, that's a standard return, however it's much better than the 10% generated by the Construction industry.

See our latest analysis for Oriental Consultants Holdings

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

What Does the ROCE Trend For Oriental Consultants Holdings Tell Us?

Investors would be pleased with what's happening at Oriental Consultants Holdings. Over the last five years, returns on capital employed have risen substantially to 20%. Basically the business is earning more per dollar of capital invested and in addition to that, 76% more capital is being employed now too. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

Another thing to note, Oriental Consultants Holdings has a high ratio of current liabilities to total assets of 71%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

Our Take On Oriental Consultants Holdings' ROCE

All in all, it's terrific to see that Oriental Consultants Holdings is reaping the rewards from prior investments and is growing its capital base. Since the stock has returned a staggering 250% to shareholders over the last five years, it looks like investors are recognizing these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

While Oriental Consultants Holdings looks impressive, no company is worth an infinite price. The intrinsic value infographic in our free research report helps visualize whether 2498 is currently trading for a fair price.

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. 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.
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