Investors Met With Slowing Returns on Capital At Borneo Oil Berhad (KLSE:BORNOIL)

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. Having said that, from a first glance at Borneo Oil Berhad (KLSE:BORNOIL) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Borneo Oil Berhad, this is the formula:

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

0.037 = RM29m ÷ (RM823m - RM18m) (Based on the trailing twelve months to June 2021).

Thus, Borneo Oil Berhad has an ROCE of 3.7%. In absolute terms, that's a low return and it also under-performs the Hospitality industry average of 7.9%.

Check out our latest analysis for Borneo Oil Berhad

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

The Trend Of ROCE

The returns on capital haven't changed much for Borneo Oil Berhad in recent years. The company has employed 44% more capital in the last five years, and the returns on that capital have remained stable at 3.7%. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

One more thing to note, even though ROCE has remained relatively flat over the last five years, the reduction in current liabilities to 2.2% of total assets, is good to see from a business owner's perspective. Effectively suppliers now fund less of the business, which can lower some elements of risk.

The Bottom Line

In summary, Borneo Oil Berhad has simply been reinvesting capital and generating the same low rate of return as before. Moreover, since the stock has crumbled 71% over the last five years, it appears investors are expecting the worst. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

Borneo Oil Berhad does have some risks, we noticed 4 warning signs (and 1 which can't be ignored) we think you should know about.

While Borneo Oil 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. 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.
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