Ocean Vantage Holdings Berhad (KLSE:OVH) Might Be Having Difficulty Using Its Capital Effectively

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after briefly looking over the numbers, we don't think Ocean Vantage Holdings Berhad (KLSE:OVH) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding Return On Capital Employed (ROCE)

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. Analysts use this formula to calculate it for Ocean Vantage Holdings Berhad:

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

0.09 = RM5.9m ÷ (RM97m - RM31m) (Based on the trailing twelve months to March 2023).

Therefore, Ocean Vantage Holdings Berhad has an ROCE of 9.0%. Even though it's in line with the industry average of 9.0%, it's still a low return by itself.

View our latest analysis for Ocean Vantage Holdings Berhad

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Ocean Vantage Holdings Berhad has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Can We Tell From Ocean Vantage Holdings Berhad's ROCE Trend?

On the surface, the trend of ROCE at Ocean Vantage Holdings Berhad doesn't inspire confidence. To be more specific, ROCE has fallen from 35% over the last five years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

On a side note, Ocean Vantage Holdings Berhad's current liabilities have increased over the last five years to 32% of total assets, effectively distorting the ROCE to some degree. Without this increase, it's likely that ROCE would be even lower than 9.0%. While the ratio isn't currently too high, it's worth keeping an eye on this because if it gets particularly high, the business could then face some new elements of risk.

Our Take On Ocean Vantage Holdings Berhad's ROCE

While returns have fallen for Ocean Vantage Holdings Berhad in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And there could be an opportunity here if other metrics look good too, because the stock has declined 20% in the last year. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

On a final note, we found 2 warning signs for Ocean Vantage Holdings Berhad (1 is a bit unpleasant) you should be aware of.

While Ocean Vantage Holdings Berhad 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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