Some Investors May Be Worried About Ornapaper Berhad's (KLSE:ORNA) Returns On Capital

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. Although, when we looked at Ornapaper Berhad (KLSE:ORNA), it didn't seem to tick all of these boxes.

Return On Capital Employed (ROCE): What Is It?

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. Analysts use this formula to calculate it for Ornapaper Berhad:

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

0.01 = RM2.2m ÷ (RM293m - RM76m) (Based on the trailing twelve months to June 2023).

So, Ornapaper Berhad has an ROCE of 1.0%. Ultimately, that's a low return and it under-performs the Packaging industry average of 10%.

View 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 want to delve into the historical earnings, revenue and cash flow of Ornapaper Berhad, check out these free graphs here.

What Does the ROCE Trend For Ornapaper Berhad Tell Us?

When we looked at the ROCE trend at Ornapaper Berhad, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 1.0% from 12% five years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. 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

We're a bit apprehensive about Ornapaper Berhad because despite more capital being deployed in the business, returns on that capital and sales have both fallen. And, the stock has remained flat over the last five years, so investors don't seem too impressed either. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

Ornapaper Berhad does have some risks, we noticed 2 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about.

While Ornapaper Berhad may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.