Ornapaper Berhad (KLSE:ORNA) 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. 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. However, after investigating Ornapaper Berhad (KLSE:ORNA), we don't think it's current trends fit the mold of a multi-bagger.

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. The formula for this calculation on Ornapaper Berhad is:

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

0.04 = RM9.0m ÷ (RM308m - RM84m) (Based on the trailing twelve months to December 2023).

Thus, Ornapaper Berhad has an ROCE of 4.0%. In absolute terms, that's a low return and it also under-performs the Packaging industry average of 9.3%.

Check out our latest analysis for Ornapaper Berhad

Historical performance is a great place to start when researching a stock so above you can see the gauge for Ornapaper Berhad's ROCE against it's prior returns. If you're interested in investigating Ornapaper Berhad's past further, check out this free graph covering Ornapaper Berhad's past earnings, revenue and cash flow.

What Does the ROCE Trend For Ornapaper Berhad Tell Us?

On the surface, the trend of ROCE at Ornapaper Berhad doesn't inspire confidence. To be more specific, ROCE has fallen from 8.6% over the last five years. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

What We Can Learn From Ornapaper Berhad's ROCE

In summary, we're somewhat concerned by Ornapaper Berhad's diminishing returns on increasing amounts of capital. Despite the concerning underlying trends, the stock has actually gained 13% over the last five years, so it might be that the investors are expecting the trends to reverse. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Ornapaper Berhad (of which 1 is concerning!) that you should know about.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.