What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. Although, when we looked at Oppein Home Group (SHSE:603833), it didn't seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

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. To calculate this metric for Oppein Home Group, this is the formula:

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

0.13 = CN¥2.8b ÷ (CN¥35b - CN¥14b) (Based on the trailing twelve months to September 2024).

So, Oppein Home Group has an ROCE of 13%. In absolute terms, that's a satisfactory return, but compared to the Consumer Durables industry average of 9.6% it's much better.

Above you can see how the current ROCE for Oppein Home Group 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 Oppein Home Group for free.

What Does the ROCE Trend For Oppein Home Group Tell Us?

In terms of Oppein Home Group's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 13% from 18% five years ago. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

On a side note, Oppein Home Group's current liabilities have increased over the last five years to 40% of total assets, effectively distorting the ROCE to some degree. Without this increase, it's likely that ROCE would be even lower than 13%. Keep an eye on this ratio, because the business could encounter some new risks if this metric gets too high.

What We Can Learn From Oppein Home Group's ROCE

In summary, we're somewhat concerned by Oppein Home Group's diminishing returns on increasing amounts of capital. Despite the concerning underlying trends, the stock has actually gained 2.4% over the last five years, so it might be that the investors are expecting the trends to reverse. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

One more thing, we've spotted 1 warning sign facing Oppein Home Group that you might find interesting.

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.