Capital Allocation Trends At Orion Engineered Carbons (NYSE:OEC) Aren't Ideal
Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after investigating Orion Engineered Carbons (NYSE:OEC), we don't think it's current trends fit the mold of a multi-bagger.
Return On Capital Employed (ROCE): What Is It?
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 Orion Engineered Carbons, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.12 = US$158m ÷ (US$1.8b - US$582m) (Based on the trailing twelve months to June 2022).
Therefore, Orion Engineered Carbons has an ROCE of 12%. That's a pretty standard return and it's in line with the industry average of 12%.
Check out our latest analysis for Orion Engineered Carbons
Above you can see how the current ROCE for Orion Engineered Carbons 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 Orion Engineered Carbons here for free.
The Trend Of ROCE
In terms of Orion Engineered Carbons' historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 19%, but since then they've fallen to 12%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.
The Bottom Line On Orion Engineered Carbons' ROCE
Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Orion Engineered Carbons. However, despite the promising trends, the stock has fallen 29% over the last five years, so there might be an opportunity here for astute investors. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.
Orion Engineered Carbons does come with some risks though, we found 3 warning signs in our investment analysis, and 2 of those make us uncomfortable...
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
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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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