Ocean Vantage Holdings Berhad (KLSE:OVH) Is Reinvesting At Lower Rates Of Return

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out 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. Having said that, from a first glance at Ocean Vantage Holdings Berhad (KLSE:OVH) 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 Ocean Vantage Holdings Berhad, this is the formula:

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

0.13 = RM9.4m ÷ (RM101m - RM30m) (Based on the trailing twelve months to June 2023).

So, Ocean Vantage Holdings Berhad has an ROCE of 13%. In absolute terms, that's a satisfactory return, but compared to the Energy Services industry average of 10% 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.

How Are Returns Trending?

When we looked at the ROCE trend at Ocean Vantage Holdings Berhad, we didn't gain much confidence. To be more specific, ROCE has fallen from 36% over the last five years. 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. If these investments prove successful, this can bode very well for long term stock performance.

On a side note, Ocean Vantage Holdings Berhad's current liabilities have increased over the last five years to 29% of total assets, effectively distorting the ROCE to some degree. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. Keep an eye on this ratio, because the business could encounter some new risks if this metric gets too high.

The Bottom Line On Ocean Vantage Holdings Berhad's ROCE

While returns have fallen for Ocean Vantage Holdings Berhad in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. However, despite the promising trends, the stock has fallen 56% over the last three years, so there might be an opportunity here for astute investors. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

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

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.