Here's What To Make Of O-I Glass' (NYSE:OI) Decelerating Rates Of Return

By
Simply Wall St
Published
April 20, 2022
NYSE:OI
Source: Shutterstock

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. In light of that, when we looked at O-I Glass (NYSE:OI) and its ROCE trend, we weren't exactly thrilled.

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 O-I Glass is:

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

0.091 = US$633m ÷ (US$8.8b - US$1.8b) (Based on the trailing twelve months to December 2021).

Thus, O-I Glass has an ROCE of 9.1%. On its own that's a low return on capital but it's in line with the industry's average returns of 9.1%.

Check out our latest analysis for O-I Glass

roce
NYSE:OI Return on Capital Employed April 20th 2022

In the above chart we have measured O-I Glass' prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering O-I Glass here for free.

What Does the ROCE Trend For O-I Glass Tell Us?

There hasn't been much to report for O-I Glass' returns and its level of capital employed because both metrics have been steady for the past five years. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. With that in mind, unless investment picks up again in the future, we wouldn't expect O-I Glass to be a multi-bagger going forward.

The Bottom Line

In a nutshell, O-I Glass has been trudging along with the same returns from the same amount of capital over the last five years. And in the last five years, the stock has given away 39% so the market doesn't look too hopeful on these trends strengthening any time soon. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

O-I Glass does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those is potentially serious...

While O-I Glass 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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