If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. And from a first read, things don't look too good at OC Oerlikon (VTX:OERL), so let's see why.
What Is 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. To calculate this metric for OC Oerlikon, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.01 = CHF30m ÷ (CHF4.0b - CHF1.0b) (Based on the trailing twelve months to June 2024).
Therefore, OC Oerlikon has an ROCE of 1.0%. Ultimately, that's a low return and it under-performs the Machinery industry average of 15%.
See our latest analysis for OC Oerlikon
In the above chart we have measured OC Oerlikon's 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 OC Oerlikon for free.
What Does the ROCE Trend For OC Oerlikon Tell Us?
We are a bit worried about the trend of returns on capital at OC Oerlikon. To be more specific, the ROCE was 6.4% five years ago, but since then it has dropped noticeably. 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. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on OC Oerlikon becoming one if things continue as they have.
The Bottom Line
In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. It should come as no surprise then that the stock has fallen 56% over the last five years, so it looks like investors are recognizing these changes. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.
OC Oerlikon does have some risks, we noticed 2 warning signs (and 1 which can't be ignored) we think you should know about.