Be Wary Of Ocean Vantage Holdings Berhad (KLSE:OVH) And Its Returns On Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Ocean Vantage Holdings Berhad (KLSE:OVH) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Return On Capital Employed (ROCE): What Is It?

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. The formula for this calculation on Ocean Vantage Holdings Berhad is:

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

0.12 = RM9.3m ÷ (RM131m - RM55m) (Based on the trailing twelve months to September 2023).

Thus, Ocean Vantage Holdings Berhad has an ROCE of 12%. In absolute terms, that's a satisfactory return, but compared to the Energy Services industry average of 9.9% it's much better.

View our latest analysis for Ocean Vantage Holdings Berhad

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

So How Is Ocean Vantage Holdings Berhad's ROCE Trending?

When we looked at the ROCE trend at Ocean Vantage Holdings Berhad, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 12% from 37% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 42%, which has impacted the ROCE. Without this increase, it's likely that ROCE would be even lower than 12%. What this means is that in reality, a rather large portion of the business is being funded by the likes of the company's suppliers or short-term creditors, which can bring some risks of its own.

The Bottom Line On Ocean Vantage Holdings Berhad's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Ocean Vantage Holdings Berhad is reinvesting for growth and has higher sales as a result. These growth trends haven't led to growth returns though, since the stock has fallen 49% over the last three years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

Ocean Vantage Holdings Berhad does have some risks, we noticed 2 warning signs (and 1 which shouldn't be ignored) we think you should know about.

While Ocean Vantage Holdings Berhad may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.