These Return Metrics Don't Make Ovostar Union (WSE:OVO) Look Too Strong

When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. Basically the company is earning less on its investments and it is also reducing its total assets. So after glancing at the trends within Ovostar Union (WSE:OVO), we weren't too hopeful.

What is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Ovostar Union is:

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

0.055 = US$6.4m ÷ (US$141m - US$24m) (Based on the trailing twelve months to June 2021).

Thus, Ovostar Union has an ROCE of 5.5%. In absolute terms, that's a low return and it also under-performs the Food industry average of 9.4%.

View our latest analysis for Ovostar Union

Historical performance is a great place to start when researching a stock so above you can see the gauge for Ovostar Union's ROCE against it's prior returns. If you'd like to look at how Ovostar Union 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?

In terms of Ovostar Union's historical ROCE movements, the trend doesn't inspire confidence. About five years ago, returns on capital were 24%, however they're now substantially lower than that as we saw above. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. 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. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Ovostar Union becoming one if things continue as they have.

The Bottom Line On Ovostar Union's ROCE

In summary, it's unfortunate that Ovostar Union is generating lower returns from the same amount of capital. Investors haven't taken kindly to these developments, since the stock has declined 23% from where it was five years ago. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

If you'd like to know more about Ovostar Union, we've spotted 3 warning signs, and 1 of them shouldn't be ignored.

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.

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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