Orgabio Holdings Berhad (KLSE:ORGABIO) Might Be Having Difficulty Using Its Capital Effectively

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. In light of that, when we looked at Orgabio Holdings Berhad (KLSE:ORGABIO) and its ROCE trend, we weren't exactly thrilled.

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 Orgabio Holdings Berhad:

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

0.074 = RM4.7m ÷ (RM75m - RM12m) (Based on the trailing twelve months to March 2024).

Therefore, Orgabio Holdings Berhad has an ROCE of 7.4%. Even though it's in line with the industry average of 7.0%, it's still a low return by itself.

View our latest analysis for Orgabio Holdings Berhad

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

What Does the ROCE Trend For Orgabio Holdings Berhad Tell Us?

When we looked at the ROCE trend at Orgabio Holdings Berhad, we didn't gain much confidence. Around five years ago the returns on capital were 19%, but since then they've fallen to 7.4%. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a side note, Orgabio Holdings Berhad has done well to pay down its current liabilities to 16% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

Our Take On Orgabio Holdings Berhad's ROCE

Bringing it all together, while we're somewhat encouraged by Orgabio Holdings Berhad's reinvestment in its own business, we're aware that returns are shrinking. Although the market must be expecting these trends to improve because the stock has gained 54% over the last year. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 4 warning signs for Orgabio Holdings Berhad (of which 2 can't be ignored!) that you should know about.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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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