There's Been No Shortage Of Growth Recently For Optimus Group's (TSE:9268) Returns On Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. With that in mind, we've noticed some promising trends at Optimus Group (TSE:9268) so let's look a bit deeper.

What Is 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 Optimus Group, this is the formula:

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

0.15 = JP¥5.3b ÷ (JP¥130b - JP¥95b) (Based on the trailing twelve months to December 2023).

Therefore, Optimus Group has an ROCE of 15%. On its own, that's a standard return, however it's much better than the 7.8% generated by the Retail Distributors industry.

Check out our latest analysis for Optimus Group

In the above chart we have measured Optimus Group's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Optimus Group .

What Does the ROCE Trend For Optimus Group Tell Us?

Investors would be pleased with what's happening at Optimus Group. The data shows that returns on capital have increased substantially over the last five years to 15%. The amount of capital employed has increased too, by 205%. 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.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Essentially the business now has suppliers or short-term creditors funding about 73% of its operations, which isn't ideal. And with current liabilities at those levels, that's pretty high.

What We Can Learn From Optimus Group's ROCE

To sum it up, Optimus Group has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Since the stock has returned a staggering 875% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it's worth looking further into this stock because if Optimus Group can keep these trends up, it could have a bright future ahead.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Optimus Group (of which 2 are a bit unpleasant!) that you should know about.

While Optimus Group may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.