Stock Analysis

Orion Energy Systems (NASDAQ:OESX) Might Have The Makings Of A Multi-Bagger

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NasdaqCM:OESX
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To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So on that note, Orion Energy Systems (NASDAQ:OESX) looks quite promising in regards to its trends of return on capital.

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. To calculate this metric for Orion Energy Systems, this is the formula:

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

0.11 = US$4.3m ÷ (US$74m - US$33m) (Based on the trailing twelve months to December 2020).

So, Orion Energy Systems has an ROCE of 11%. On its own, that's a standard return, however it's much better than the 8.5% generated by the Electrical industry.

See our latest analysis for Orion Energy Systems

roce
NasdaqCM:OESX Return on Capital Employed April 12th 2021

Above you can see how the current ROCE for Orion Energy Systems compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

How Are Returns Trending?

Like most people, we're pleased that Orion Energy Systems is now generating some pretax earnings. While the business is profitable now, it used to be incurring losses on invested capital five years ago. Additionally, the business is utilizing 36% less capital than it was five years ago, and taken at face value, that can mean the company needs less funds at work to get a return. Orion Energy Systems could be selling under-performing assets since the ROCE is improving.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. The current liabilities has increased to 45% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. And with current liabilities at those levels, that's pretty high.

What We Can Learn From Orion Energy Systems' ROCE

In summary, it's great to see that Orion Energy Systems has been able to turn things around and earn higher returns on lower amounts of capital. Since the stock has returned a staggering 350% to shareholders over the last five years, it looks like investors are recognizing these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

Orion Energy Systems does have some risks though, and we've spotted 2 warning signs for Orion Energy Systems that you might be interested in.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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What are the risks and opportunities for Orion Energy Systems?

Orion Energy Systems, Inc. researches, designs, develops, manufactures, markets, sells, installs, and implements energy management systems for commercial office and retail, exterior area lighting, and industrial applications in North America.

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Rewards

  • Earnings are forecast to grow 71.47% per year

Risks

  • Does not have a meaningful market cap ($59M)

  • Shareholders have been diluted in the past year

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