We Like These Underlying Return On Capital Trends At Smartoptics Group (OB:SMOP)

June 15, 2022
  •  Updated
October 12, 2022
OB:SMOP
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Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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 Smartoptics Group (OB:SMOP) and its 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. The formula for this calculation on Smartoptics Group is:

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

0.16 = kr42m ÷ (kr312m - kr55m) (Based on the trailing twelve months to March 2022).

Therefore, Smartoptics Group has an ROCE of 16%. In absolute terms, that's a satisfactory return, but compared to the Communications industry average of 11% it's much better.

Check out our latest analysis for Smartoptics Group

roce
OB:SMOP Return on Capital Employed June 15th 2022

In the above chart we have measured Smartoptics 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 report for Smartoptics Group.

How Are Returns Trending?

Investors would be pleased with what's happening at Smartoptics Group. Over the last two years, returns on capital employed have risen substantially to 16%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 132%. 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.

On a related note, the company's ratio of current liabilities to total assets has decreased to 18%, which basically reduces it's funding from the likes of short-term creditors or suppliers. So this improvement in ROCE has come from the business' underlying economics, which is great to see.

The Key Takeaway

All in all, it's terrific to see that Smartoptics Group is reaping the rewards from prior investments and is growing its capital base. Investors may not be impressed by the favorable underlying trends yet because over the last year the stock has only returned 5.4% to shareholders. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for Smartoptics Group (of which 1 shouldn't be ignored!) that you should know about.

While Smartoptics Group isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

Valuation is complex, but we're helping make it simple.

Find out whether Smartoptics Group is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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