Returns On Capital Are A Standout For Oriental Consultants Holdings (TYO:2498)

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. And in light of that, the trends we're seeing at Oriental Consultants Holdings' (TYO:2498) look very promising so lets take a look.

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. Analysts use this formula to calculate it for Oriental Consultants Holdings:

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

0.21 = JP¥2.9b ÷ (JP¥51b - JP¥38b) (Based on the trailing twelve months to December 2020).

So, Oriental Consultants Holdings has an ROCE of 21%. That's a fantastic return and not only that, it outpaces the average of 10% earned by companies in a similar industry.

View our latest analysis for Oriental Consultants Holdings

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of Oriental Consultants Holdings, check out these free graphs here.

What The Trend Of ROCE Can Tell Us

We like the trends that we're seeing from Oriental Consultants Holdings. The data shows that returns on capital have increased substantially over the last five years to 21%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 80%. So we're very much inspired by what we're seeing at Oriental Consultants Holdings thanks to its ability to profitably reinvest capital.

On a side note, Oriental Consultants Holdings' current liabilities are still rather high at 74% of total assets. 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. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

Our Take On Oriental Consultants Holdings' ROCE

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Oriental Consultants Holdings has. And a remarkable 252% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if Oriental Consultants Holdings can keep these trends up, it could have a bright future ahead.

Like most companies, Oriental Consultants Holdings does come with some risks, and we've found 2 warning signs that you should be aware of.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.

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