Yahoo Finance OCB Berhad (KLSE:OCB) Shareholders Will Want The ROCE Trajectory To Continue
Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. Speaking of which, we noticed some great changes in OCB Berhad's (KLSE:OCB) returns on capital, so let's have a look.
Understanding Return On Capital Employed (ROCE)
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on OCB Berhad is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.059 = RM14m ÷ (RM316m - RM85m) (Based on the trailing twelve months to March 2024).
Thus, OCB Berhad has an ROCE of 5.9%. In absolute terms, that's a low return but it's around the Food industry average of 7.1%.
View our latest analysis for OCB Berhad
Historical performance is a great place to start when researching a stock so above you can see the gauge for OCB Berhad's ROCE against it's prior returns. If you'd like to look at how OCB Berhad has performed in the past in other metrics, you can view this free graph of OCB Berhad's past earnings, revenue and cash flow.
So How Is OCB Berhad's ROCE Trending?
Shareholders will be relieved that OCB Berhad has broken into profitability. The company was generating losses five years ago, but has managed to turn it around and as we saw earlier is now earning 5.9%, which is always encouraging. On top of that, what's interesting is that the amount of capital being employed has remained steady, so the business hasn't needed to put any additional money to work to generate these higher returns. So while we're happy that the business is more efficient, just keep in mind that could mean that going forward the business is lacking areas to invest internally for growth. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.
The Bottom Line On OCB Berhad's ROCE
In summary, we're delighted to see that OCB Berhad has been able to increase efficiencies and earn higher rates of return on the same amount of capital. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 65% return over the last five years. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.
One more thing to note, we've identified 1 warning sign with OCB Berhad and understanding this should be part of your investment process.
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. 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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