Returns At Oi Electric (TSE:6822) Are On The Way Up

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So when we looked at Oi Electric (TSE:6822) and its trend of ROCE, we really liked what we saw.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Oi Electric:

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

0.14 = JP¥1.6b ÷ (JP¥22b - JP¥10b) (Based on the trailing twelve months to December 2024).

Thus, Oi Electric has an ROCE of 14%. On its own, that's a standard return, however it's much better than the 9.3% generated by the Communications industry.

See our latest analysis for Oi Electric

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

What Does the ROCE Trend For Oi Electric Tell Us?

Shareholders will be relieved that Oi Electric has broken into profitability. The company now earns 14% on its capital, because five years ago it was incurring losses. Interestingly, the capital employed by the business has remained relatively flat, so these higher returns are either from prior investments paying off or increased efficiencies. With no noticeable increase in capital employed, it's worth knowing what the company plans on doing going forward in regards to reinvesting and growing the business. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.

On a side note, Oi Electric's current liabilities are still rather high at 47% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

Our Take On Oi Electric's ROCE

To bring it all together, Oi Electric has done well to increase the returns it's generating from its capital employed. Astute investors may have an opportunity here because the stock has declined 24% in the last five years. With that in mind, we believe the promising trends warrant this stock for further investigation.

One more thing to note, we've identified 2 warning signs with Oi Electric and understanding them should be part of your investment process.

While Oi Electric 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.