U.S. markets open in 8 hours 5 minutes
  • S&P Futures

    3,975.25
    +9.50 (+0.24%)
     
  • Dow Futures

    33,846.00
    +43.00 (+0.13%)
     
  • Nasdaq Futures

    11,685.25
    +39.75 (+0.34%)
     
  • Russell 2000 Futures

    1,822.40
    +2.70 (+0.15%)
     
  • Crude Oil

    71.84
    +0.38 (+0.53%)
     
  • Gold

    1,807.60
    +6.10 (+0.34%)
     
  • Silver

    23.42
    +0.18 (+0.77%)
     
  • EUR/USD

    1.0580
    +0.0020 (+0.19%)
     
  • 10-Yr Bond

    3.4910
    0.0000 (0.00%)
     
  • Vix

    22.29
    -0.39 (-1.72%)
     
  • GBP/USD

    1.2266
    +0.0028 (+0.23%)
     
  • USD/JPY

    136.0600
    -0.5700 (-0.42%)
     
  • BTC-USD

    17,222.09
    +408.74 (+2.43%)
     
  • CMC Crypto 200

    406.05
    +11.36 (+2.88%)
     
  • FTSE 100

    7,472.17
    -17.02 (-0.23%)
     
  • Nikkei 225

    27,901.01
    +326.58 (+1.18%)
     

O-I Glass (NYSE:OI) Will Be Hoping To Turn Its Returns On Capital Around

If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. In light of that, from a first glance at O-I Glass (NYSE:OI), we've spotted some signs that it could be struggling, so let's investigate.

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. Analysts use this formula to calculate it for O-I Glass:

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

0.071 = US$493m ÷ (US$8.8b - US$1.8b) (Based on the trailing twelve months to December 2021).

So, O-I Glass has an ROCE of 7.1%. Ultimately, that's a low return and it under-performs the Packaging industry average of 9.9%.

Check out our latest analysis for O-I Glass

roce
roce

In the above chart we have measured O-I Glass' prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering O-I Glass here for free.

How Are Returns Trending?

In terms of O-I Glass' historical ROCE movements, the trend doesn't inspire confidence. About five years ago, returns on capital were 8.8%, however they're now substantially lower than that as we saw above. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. If these trends continue, we wouldn't expect O-I Glass to turn into a multi-bagger.

The Key Takeaway

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. It should come as no surprise then that the stock has fallen 31% over the last five years, so it looks like investors are recognizing these changes. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

If you'd like to know more about O-I Glass, we've spotted 2 warning signs, and 1 of them is concerning.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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.