Returns On Capital At OKA Corporation Bhd (KLSE:OKA) Paint An Interesting Picture

There are a few key trends to look for if we want to identify the next multi-bagger. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at OKA Corporation Bhd (KLSE:OKA) and its ROCE trend, we weren't exactly thrilled.

What is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for OKA Corporation Bhd, this is the formula:

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

0.08 = RM15m ÷ (RM205m - RM23m) (Based on the trailing twelve months to December 2020).

So, OKA Corporation Bhd has an ROCE of 8.0%. On its own, that's a low figure but it's around the 9.2% average generated by the Basic Materials industry.

Check out our latest analysis for OKA Corporation Bhd

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

How Are Returns Trending?

When we looked at the ROCE trend at OKA Corporation Bhd, we didn't gain much confidence. Around five years ago the returns on capital were 17%, but since then they've fallen to 8.0%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

The Key Takeaway

From the above analysis, we find it rather worrisome that returns on capital and sales for OKA Corporation Bhd have fallen, meanwhile the business is employing more capital than it was five years ago. Yet despite these concerning fundamentals, the stock has performed strongly with a 47% return over the last five years, so investors appear very optimistic. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

One final note, you should learn about the 3 warning signs we've spotted with OKA Corporation Bhd (including 1 which is a bit concerning) .

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. 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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