Objective (ASX:OCL) Is Achieving High Returns On Its Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. With that in mind, the ROCE of Objective (ASX:OCL) looks great, so lets see what the trend can tell us.

Return On Capital Employed (ROCE): What is it?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Objective is:

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

0.38 = AU$18m ÷ (AU$92m - AU$44m) (Based on the trailing twelve months to December 2020).

Thus, Objective has an ROCE of 38%. In absolute terms that's a great return and it's even better than the Software industry average of 14%.

Check out our latest analysis for Objective

Historical performance is a great place to start when researching a stock so above you can see the gauge for Objective's ROCE against it's prior returns. If you're interested in investigating Objective's past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Objective Tell Us?

Objective is displaying some positive trends. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 38%. Basically the business is earning more per dollar of capital invested and in addition to that, 191% more capital is being employed now too. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

Another thing to note, Objective has a high ratio of current liabilities to total assets of 48%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

What We Can Learn From Objective's ROCE

To sum it up, Objective has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. Therefore, we think it would be worth your time to check if these trends are going to continue.

While Objective looks impressive, no company is worth an infinite price. The intrinsic value infographic in our free research report helps visualize whether OCL 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.

When trading Objective or any other investment, use the platform considered by many to be the Professional's Gateway to the Worlds Market, Interactive Brokers. You get the lowest-cost* trading on stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.