Is Oil Terminal (BVB:OIL) Using Capital Effectively?

To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. In light of that, from a first glance at Oil Terminal (BVB:OIL), we've spotted some signs that it could be struggling, so let's investigate.

Understanding 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 Oil Terminal is:

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

0.019 = RON9.9m ÷ (RON566m - RON32m) (Based on the trailing twelve months to December 2020).

Thus, Oil Terminal has an ROCE of 1.9%. Ultimately, that's a low return and it under-performs the Oil and Gas industry average of 5.1%.

Check out our latest analysis for Oil Terminal

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

What Does the ROCE Trend For Oil Terminal Tell Us?

We are a bit worried about the trend of returns on capital at Oil Terminal. Unfortunately the returns on capital have diminished from the 3.3% that they were earning five years ago. Meanwhile, capital employed in the business has stayed roughly the flat over the period. 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 Oil Terminal becoming one if things continue as they have.

In Conclusion...

In summary, it's unfortunate that Oil Terminal is generating lower returns from the same amount of capital. The market must be rosy on the stock's future because even though the underlying trends aren't too encouraging, the stock has soared 158%. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

If you want to know some of the risks facing Oil Terminal we've found 2 warning signs (1 doesn't sit too well with us!) that you should be aware of before investing here.

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. 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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