Returns At Orion Group Holdings (NYSE:ORN) Are On The Way Up
If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Speaking of which, we noticed some great changes in Orion Group Holdings' (NYSE:ORN) returns on capital, so let's have a look.
Return On Capital Employed (ROCE): What is it?
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Orion Group Holdings is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.044 = US$9.5m ÷ (US$383m - US$170m) (Based on the trailing twelve months to June 2021).
So, Orion Group Holdings has an ROCE of 4.4%. Ultimately, that's a low return and it under-performs the Construction industry average of 9.8%.
Check out our latest analysis for Orion Group Holdings
Above you can see how the current ROCE for Orion Group Holdings compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Orion Group Holdings.
What Can We Tell From Orion Group Holdings' ROCE Trend?
Like most people, we're pleased that Orion Group Holdings is now generating some pretax earnings. The company was generating losses five years ago, but now it's turned around, earning 4.4% which is no doubt a relief for some early shareholders. In regards to capital employed, Orion Group Holdings is using 37% less capital than it was five years ago, which on the surface, can indicate that the business has become more efficient at generating these returns. This could potentially mean that the company is selling some of its assets.
On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Effectively this means that suppliers or short-term creditors are now funding 44% of the business, which is more than it was five years ago. And with current liabilities at those levels, that's pretty high.
In Conclusion...
In the end, Orion Group Holdings has proven it's capital allocation skills are good with those higher returns from less amount of capital. Given the stock has declined 14% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. With that in mind, we believe the promising trends warrant this stock for further investigation.
Like most companies, Orion Group Holdings does come with some risks, and we've found 1 warning sign that you should be aware of.
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.
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. 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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