Yahoo Finance There's Been No Shortage Of Growth Recently For Orascom Development Holding's (VTX:ODHN) Returns On Capital
If you're looking for a multi-bagger, there's a few things to keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Speaking of which, we noticed some great changes in Orascom Development Holding's (VTX:ODHN) returns on capital, so let's have a look.
Return On Capital Employed (ROCE): What Is It?
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its 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)
0.085 = CHF103m ÷ (CHF1.8b - CHF614m) (Based on the trailing twelve months to December 2022).
Therefore, Orascom Development Holding has an ROCE of 8.5%. On its own that's a low return, but compared to the average of 6.0% generated by the Hospitality industry, it's much better.
See our latest analysis for Orascom Development Holding
Above you can see how the current ROCE for Orascom Development Holding compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Orascom Development Holding here for free.
What The Trend Of ROCE Can Tell Us
The fact that Orascom Development Holding is now generating some pre-tax profits from its prior investments is very encouraging. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 8.5% on its capital. Not only that, but the company is utilizing 73% more capital than before, but that's to be expected from a company trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.
On a related note, the company's ratio of current liabilities to total assets has decreased to 34%, which basically reduces it's funding from the likes of short-term creditors or suppliers. This tells us that Orascom Development Holding has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.
In Conclusion...
To the delight of most shareholders, Orascom Development Holding has now broken into profitability. Given the stock has declined 61% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. So researching this company further and determining whether or not these trends will continue seems justified.
Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for Orascom Development Holding (of which 1 is a bit unpleasant!) that you should know about.
While Orascom Development Holding 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.
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