Oil Terminal's (BVB:OIL) Returns On Capital Not Reflecting Well On The Business

When researching a stock for investment, what can tell us that the company is in decline? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. On that note, looking into Oil Terminal (BVB:OIL), we weren't too upbeat about how things were going.

Understanding 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. Analysts use this formula to calculate it for Oil Terminal:

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

0.02 = RON11m ÷ (RON563m - RON25m) (Based on the trailing twelve months to March 2021).

So, Oil Terminal has an ROCE of 2.0%. Even though it's in line with the industry average of 2.0%, it's still a low return by itself.

See our latest analysis for Oil Terminal

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Oil Terminal's past further, check out this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

We are a bit worried about the trend of returns on capital at Oil Terminal. Unfortunately the returns on capital have diminished from the 3.4% that they were earning five years ago. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. If these trends continue, we wouldn't expect Oil Terminal to turn into a multi-bagger.

What We Can Learn From Oil Terminal's ROCE

In summary, it's unfortunate that Oil Terminal is generating lower returns from the same amount of capital. Yet despite these poor fundamentals, the stock has gained a huge 142% over the last five years, so investors appear very optimistic. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

One final note, you should learn about the 2 warning signs we've spotted with Oil Terminal (including 1 which is concerning) .

While Oil Terminal 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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