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How Do Orion Group Holdings, Inc.’s (NYSE:ORN) Returns Compare To Its Industry?

Simply Wall St

Today we’ll look at Orion Group Holdings, Inc. (NYSE:ORN) and reflect on its potential as an investment. In particular, we’ll consider its Return On Capital Employed (ROCE), as that can give us insight into how profitably the company is able to employ capital in its business.

First of all, we’ll work out how to calculate ROCE. Second, we’ll look at its ROCE compared to similar companies. And finally, we’ll look at how its current liabilities are impacting its ROCE.

Understanding Return On Capital Employed (ROCE)

ROCE measures the ‘return’ (pre-tax profit) a company generates from capital employed in its business. In general, businesses with a higher ROCE are usually better quality. Overall, it is a valuable metric that has its flaws. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since ‘No two businesses are exactly alike.’

How Do You Calculate Return On Capital Employed?

The formula for calculating the return on capital employed is:

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

Or for Orion Group Holdings:

0.023 = US$7.0m ÷ (US$425m – US$116m) (Based on the trailing twelve months to September 2018.)

Therefore, Orion Group Holdings has an ROCE of 2.3%.

See our latest analysis for Orion Group Holdings

Does Orion Group Holdings Have A Good ROCE?

ROCE is commonly used for comparing the performance of similar businesses. We can see Orion Group Holdings’s ROCE is meaningfully below the Construction industry average of 9.6%. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Regardless of how Orion Group Holdings stacks up against its industry, its ROCE in absolute terms is quite low (especially compared to a bank account). There are potentially more appealing investments elsewhere.

Orion Group Holdings delivered an ROCE of 2.3%, which is better than 3 years ago, as was making losses back then. This makes us wonder if the company is improving.

NYSE:ORN Past Revenue and Net Income, March 18th 2019

When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. ROCE is, after all, simply a snap shot of a single year. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.

Do Orion Group Holdings’s Current Liabilities Skew Its ROCE?

Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills that need to be paid within 12 months. The ROCE equation subtracts current liabilities from capital employed, so a company with a lot of current liabilities appears to have less capital employed, and a higher ROCE than otherwise. To check the impact of this, we calculate if a company has high current liabilities relative to its total assets.

Orion Group Holdings has total liabilities of US$116m and total assets of US$425m. As a result, its current liabilities are equal to approximately 27% of its total assets. This is not a high level of current liabilities, which would not boost the ROCE by much.

The Bottom Line On Orion Group Holdings’s ROCE

Orion Group Holdings has a poor ROCE, and there may be better investment prospects out there. But note: Orion Group Holdings may not be the best stock to buy. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).

I will like Orion Group Holdings better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.