UK Markets closed

Investors Will Want Orascom Development Holding's (VTX:ODHN) Growth In ROCE To Persist

What are the early trends we should look for to identify a stock that could 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at Orascom Development Holding (VTX:ODHN) and its trend of ROCE, we really liked what we saw.

Return On Capital Employed (ROCE): What Is It?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Orascom Development Holding is:

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

0.062 = CHF87m ÷ (CHF2.1b - CHF701m) (Based on the trailing twelve months to September 2022).

So, Orascom Development Holding has an ROCE of 6.2%. On its own that's a low return on capital but it's in line with the industry's average returns of 5.9%.

View our latest analysis for Orascom Development Holding

roce
roce

In the above chart we have measured Orascom Development Holding's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Can We Tell From Orascom Development Holding's ROCE Trend?

Orascom Development Holding has recently broken into profitability so their prior investments seem to be paying off. The company was generating losses five years ago, but now it's earning 6.2% which is a sight for sore eyes. And unsurprisingly, like most companies trying to break into the black, Orascom Development Holding is utilizing 101% more capital than it was five years ago. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 33%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance.

The Bottom Line

To the delight of most shareholders, Orascom Development Holding has now broken into profitability. Astute investors may have an opportunity here because the stock has declined 32% in the last five years. With that in mind, we believe the promising trends warrant this stock for further investigation.

Orascom Development Holding does have some risks, we noticed 2 warning signs (and 1 which doesn't sit too well with us) we think you should know about.

While Orascom Development Holding 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.

Join A Paid User Research Session
You’ll receive a US$30 Amazon Gift card for 1 hour of your time while helping us build better investing tools for the individual investors like yourself. Sign up here