OneConstruction Group's (NASDAQ:ONEG) Returns On Capital Not Reflecting Well On The Business
Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after briefly looking over the numbers, we don't think OneConstruction Group (NASDAQ:ONEG) 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 OneConstruction Group:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.05 = US$1.7m ÷ (US$50m - US$16m) (Based on the trailing twelve months to March 2025).
Thus, OneConstruction Group has an ROCE of 5.0%. In absolute terms, that's a low return and it also under-performs the Construction industry average of 16%.
Check out our latest analysis for OneConstruction Group
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 want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of OneConstruction Group.
The Trend Of ROCE
On the surface, the trend of ROCE at OneConstruction Group doesn't inspire confidence. Over the last two years, returns on capital have decreased to 5.0% from 36% two years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. 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, OneConstruction Group has done well to pay down its current liabilities to 32% of total assets. Since the ratio used to be 88%, that's a significant reduction and it no doubt explains the drop in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.
The Bottom Line On OneConstruction Group's ROCE
From the above analysis, we find it rather worrisome that returns on capital and sales for OneConstruction Group have fallen, meanwhile the business is employing more capital than it was two years ago. Investors haven't taken kindly to these developments, since the stock has declined 57% from where it was year ago. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.
OneConstruction Group does come with some risks though, we found 5 warning signs in our investment analysis, and 3 of those are 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.
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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.