Returns On Capital Are Showing Encouraging Signs At OPTEX GROUP Company (TSE:6914)

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at OPTEX GROUP Company (TSE:6914) and its trend of ROCE, we really liked what we saw.

This technology could replace computers: discover the 20 stocks are working to make quantum computing a reality.

Understanding Return On Capital Employed (ROCE)

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 OPTEX GROUP Company is:

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

0.13 = JP¥7.1b ÷ (JP¥73b - JP¥18b) (Based on the trailing twelve months to December 2024).

Thus, OPTEX GROUP Company has an ROCE of 13%. On its own, that's a standard return, however it's much better than the 9.0% generated by the Electronic industry.

View our latest analysis for OPTEX GROUP Company

In the above chart we have measured OPTEX GROUP Company's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering OPTEX GROUP Company for free.

What The Trend Of ROCE Can Tell Us

The trends we've noticed at OPTEX GROUP Company are quite reassuring. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 13%. Basically the business is earning more per dollar of capital invested and in addition to that, 54% more capital is being employed now too. So we're very much inspired by what we're seeing at OPTEX GROUP Company thanks to its ability to profitably reinvest capital.

The Bottom Line On OPTEX GROUP Company's ROCE

In summary, it's great to see that OPTEX GROUP Company can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. Since the stock has returned a solid 54% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

OPTEX GROUP Company does have some risks though, and we've spotted 1 warning sign for OPTEX GROUP Company that you might be interested in.

While OPTEX GROUP Company 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.

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

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.