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What trends should we look for it we want to identify stocks that can multiply in value over the long term? Amongst other things, we’ll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company’s amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Having said that, from a first glance at Orbit Exports (NSE:ORBTEXP) we aren’t jumping out of our chairs at how returns are trending, but let’s have a deeper 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. Analysts use this formula to calculate it for Orbit Exports:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.011 = ₹22m ÷ (₹2.1b – ₹186m) (Based on the trailing twelve months to December 2020).
Therefore, Orbit Exports has an ROCE of 1.1%. Ultimately, that’s a low return and it under-performs the Luxury industry average of 9.5%.
See our latest analysis for Orbit Exports
Historical performance is a great place to start when researching a stock so above you can see the gauge for Orbit Exports’ ROCE against it’s prior returns. If you want to delve into the historical earnings, revenue and cash flow of Orbit Exports, check out these free graphs here.
What The Trend Of ROCE Can Tell Us
On the surface, the trend of ROCE at Orbit Exports doesn’t inspire confidence. Over the last five years, returns on capital have decreased to 1.1% from 27% five years ago. And considering revenue has dropped while employing more capital, we’d be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven’t increased.
On a related note, Orbit Exports has decreased its current liabilities to 8.7% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business’ efficiency at generating ROCE since it is now funding more of the operations with its own money.
The Bottom Line On Orbit Exports’ ROCE
We’re a bit apprehensive about Orbit Exports because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Investors haven’t taken kindly to these developments, since the stock has declined 50% from where it was five years ago. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.
On a final note, we found 5 warning signs for Orbit Exports (1 is concerning) you should be aware of.
While Orbit Exports isn’t earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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This article by Simply Wall St is general in nature. 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.
*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020
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