Returns On Capital At Oceancash Pacific Berhad (KLSE:OCNCASH) Paint An Interesting Picture

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. Although, when we looked at Oceancash Pacific Berhad (KLSE:OCNCASH), it didn't seem to tick all of these boxes.

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. Analysts use this formula to calculate it for Oceancash Pacific Berhad:

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

0.047 = RM5.1m ÷ (RM128m - RM20m) (Based on the trailing twelve months to September 2020).

Therefore, Oceancash Pacific Berhad has an ROCE of 4.7%. Ultimately, that's a low return and it under-performs the Luxury industry average of 6.8%.

View our latest analysis for Oceancash Pacific Berhad

In the above chart we have measured Oceancash Pacific Berhad's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Does the ROCE Trend For Oceancash Pacific Berhad Tell Us?

When we looked at the ROCE trend at Oceancash Pacific Berhad, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 4.7% from 13% five years ago. However it looks like Oceancash Pacific Berhad 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 Oceancash Pacific Berhad's ROCE

Bringing it all together, while we're somewhat encouraged by Oceancash Pacific Berhad's reinvestment in its own business, we're aware that returns are shrinking. Although the market must be expecting these trends to improve because the stock has gained 41% over the last five years. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

One more thing to note, we've identified 4 warning signs with Oceancash Pacific Berhad and understanding these should be part of your investment process.

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. 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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