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If we want to find a stock that could multiply over the long term, what are the underlying trends we should look 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. Ultimately, this demonstrates that it’s a business that is reinvesting profits at increasing rates of return. However, after investigating Orbit Exports (NSE:ORBTEXP), we don’t think it’s current trends fit the mold of a multi-bagger.
Return On Capital Employed (ROCE): What Is It?
If you haven’t worked with ROCE before, it measures the ‘return’ (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Orbit Exports:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.15 = ₹389m ÷ (₹3.0b – ₹412m) (Based on the trailing twelve months to September 2022).
So, Orbit Exports has an ROCE of 15%. In absolute terms, that’s a pretty normal return, and it’s somewhat close to the Luxury industry average of 13%.
View our latest analysis for Orbit Exports
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 Orbit Exports’ past further, check out this free graph of past earnings, revenue and cash flow.
How Are Returns Trending?
When we looked at the ROCE trend at Orbit Exports, we didn’t gain much confidence. Over the last five years, returns on capital have decreased to 15% from 19% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.
In Conclusion…
Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Orbit Exports. These trends don’t appear to have influenced returns though, because the total return from the stock has been mostly flat over the last five years. So we think it’d be worthwhile to look further into this stock given the trends look encouraging.
If you’d like to know more about Orbit Exports, we’ve spotted 2 warning signs, and 1 of them can’t be ignored.
While Orbit Exports 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.
Valuation is complex, but we’re helping make it simple.
Find out whether Orbit Exports is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.
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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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