Oriental Holdings Berhad (KLSE:ORIENT) Will Be Hoping To Turn Its Returns On Capital Around

When we're researching a company, it's sometimes hard to find the warning signs, but there are some financial metrics that can help spot trouble early. Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. Basically the company is earning less on its investments and it is also reducing its total assets. And from a first read, things don't look too good at Oriental Holdings Berhad (KLSE:ORIENT), so let's see why.

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

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

0.028 = RM219m ÷ (RM10b - RM2.3b) (Based on the trailing twelve months to December 2020).

Thus, Oriental Holdings Berhad has an ROCE of 2.8%. In absolute terms, that's a low return and it also under-performs the Auto industry average of 5.3%.

Check out our latest analysis for Oriental Holdings Berhad

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

What Can We Tell From Oriental Holdings Berhad's ROCE Trend?

We are a bit worried about the trend of returns on capital at Oriental Holdings Berhad. To be more specific, the ROCE was 5.0% five years ago, but since then it has dropped noticeably. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. If these trends continue, we wouldn't expect Oriental Holdings Berhad to turn into a multi-bagger.

The Key Takeaway

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. And long term shareholders have watched their investments stay flat over the last five years. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

If you want to know some of the risks facing Oriental Holdings Berhad we've found 4 warning signs (1 makes us a bit uncomfortable!) that you should be aware of before investing here.

While Oriental Holdings Berhad 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. 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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