Returns On Capital Tell Us A Lot About Oriental Food Industries Holdings Berhad (KLSE:OFI)

If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. This indicates the company is producing less profit from its investments and its total assets are decreasing. So after we looked into Oriental Food Industries Holdings Berhad (KLSE:OFI), the trends above didn't look too great.

Understanding Return On Capital Employed (ROCE)

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. Analysts use this formula to calculate it for Oriental Food Industries Holdings Berhad:

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

0.076 = RM17m ÷ (RM257m - RM38m) (Based on the trailing twelve months to September 2020).

Therefore, Oriental Food Industries Holdings Berhad has an ROCE of 7.6%. On its own, that's a low figure but it's around the 6.8% average generated by the Food industry.

View our latest analysis for Oriental Food Industries Holdings Berhad

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

So How Is Oriental Food Industries Holdings Berhad's ROCE Trending?

There is reason to be cautious about Oriental Food Industries Holdings Berhad, given the returns are trending downwards. To be more specific, the ROCE was 18% five years ago, but since then it has dropped noticeably. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. If these trends continue, we wouldn't expect Oriental Food Industries Holdings Berhad to turn into a multi-bagger.

The Bottom Line On Oriental Food Industries Holdings Berhad's ROCE

In summary, it's unfortunate that Oriental Food Industries Holdings Berhad is generating lower returns from the same amount of capital. It should come as no surprise then that the stock has fallen 57% over the last five years, so it looks like investors are recognizing these changes. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

One final note, you should learn about the 3 warning signs we've spotted with Oriental Food Industries Holdings Berhad (including 1 which is is a bit concerning) .

While Oriental Food Industries 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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