Returns On Capital At Ocean Vantage Holdings Berhad (KLSE:OVH) Paint A Concerning Picture

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. 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.

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

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

0.13 = RM9.4m ÷ (RM88m - RM18m) (Based on the trailing twelve months to September 2022).

Therefore, 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 7.6% it's much better.

Check out the opportunities and risks within the MY Energy Services industry.

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.

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at Ocean Vantage Holdings Berhad doesn't inspire confidence. To be more specific, ROCE has fallen from 34% over the last five years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a related note, Ocean Vantage Holdings Berhad has decreased its current liabilities to 20% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Bottom Line

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. However, despite the promising trends, the stock has fallen 31% over the last year, 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.

One more thing to note, we've identified 3 warning signs with Ocean Vantage Holdings Berhad and understanding these should be part of your investment process.

While Ocean Vantage 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. 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.