There are a few key trends to look for if we want to identify the next multi-bagger. Amongst other things, we’ll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company’s amount 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. So, when we ran our eye over OEM International’s (STO:OEM B) trend of ROCE, we really liked what we saw.
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. To calculate this metric for OEM International, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.27 = kr379m ÷ (kr1.9b – kr466m) (Based on the trailing twelve months to June 2020).
Thus, OEM International has an ROCE of 27%. In absolute terms that’s a great return and it’s even better than the Trade Distributors industry average of 15%.
Historical performance is a great place to start when researching a stock so above you can see the gauge for OEM International’s ROCE against it’s prior returns. If you’re interested in investigating OEM International’s past further, check out this free graph of past earnings, revenue and cash flow.
What The Trend Of ROCE Can Tell Us
In terms of OEM International’s history of ROCE, it’s quite impressive. Over the past five years, ROCE has remained relatively flat at around 27% and the business has deployed 110% more capital into its operations. Returns like this are the envy of most businesses and given it has repeatedly reinvested at these rates, that’s even better. You’ll see this when looking at well operated businesses or favorable business models.On a side note, OEM International has done well to reduce current liabilities to 25% of total assets over the last five years. Effectively suppliers now fund less of the business, which can lower some elements of risk.
The Bottom Line On OEM International’s ROCE
OEM International has demonstrated its proficiency by generating high returns on increasing amounts of capital employed, which we’re thrilled about. On top of that, the stock has rewarded shareholders with a remarkable 163% return to those who’ve held over the last five years. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.
While OEM International looks impressive, no company is worth an infinite price. The intrinsic value infographic in our free research report helps visualize whether OEM B is currently trading for a fair price.
If you’d like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.
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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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