Yahoo Finance OPG Power Ventures (LON:OPG) Will Be Looking To Turn Around Its Returns
When we're researching a company, it's sometimes hard to find the warning signs, but there are some financial metrics that can help spot trouble early. Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. And from a first read, things don't look too good at OPG Power Ventures (LON:OPG), so let's see why.
What is Return On Capital Employed (ROCE)?
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for OPG Power Ventures, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.09 = UK£20m ÷ (UK£274m - UK£52m) (Based on the trailing twelve months to September 2021).
Thus, OPG Power Ventures has an ROCE of 9.0%. In absolute terms, that's a low return but it's around the Electric Utilities industry average of 7.6%.
Check out our latest analysis for OPG Power Ventures
In the above chart we have measured OPG Power Ventures' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for OPG Power Ventures.
What The Trend Of ROCE Can Tell Us
The trend of ROCE at OPG Power Ventures is showing some signs of weakness. The company used to generate 13% on its capital five years ago but it has since fallen noticeably. On top of that, the business is utilizing 53% less capital within its operations. The fact that both are shrinking is an indication that the business is going through some tough times. Typically businesses that exhibit these characteristics aren't the ones that tend to multiply over the long term, because statistically speaking, they've already gone through the growth phase of their life cycle.
The Bottom Line On OPG Power Ventures' ROCE
In short, lower returns and decreasing amounts capital employed in the business doesn't fill us with confidence. We expect this has contributed to the stock plummeting 85% during the last five years. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.
One final note, you should learn about the 5 warning signs we've spotted with OPG Power Ventures (including 1 which is significant) .
While OPG Power Ventures 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. 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.
