Why The 31% Return On Capital At Smartoptics Group (OB:SMOP) Should Have Your Attention

What trends should we look for it we want to identify stocks that can multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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. And in light of that, the trends we're seeing at Smartoptics Group's (OB:SMOP) look very promising so lets take a look.

What Is 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 Smartoptics Group is:

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

0.31 = kr101m ÷ (kr435m - kr111m) (Based on the trailing twelve months to December 2022).

Thus, Smartoptics Group has an ROCE of 31%. That's a fantastic return and not only that, it outpaces the average of 13% earned by companies in a similar industry.

See our latest analysis for Smartoptics Group

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're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Does the ROCE Trend For Smartoptics Group Tell Us?

We like the trends that we're seeing from Smartoptics Group. Over the last three years, returns on capital employed have risen substantially to 31%. Basically the business is earning more per dollar of capital invested and in addition to that, 212% more capital is being employed now too. So we're very much inspired by what we're seeing at Smartoptics Group thanks to its ability to profitably reinvest capital.

One more thing to note, Smartoptics Group has decreased current liabilities to 26% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. This tells us that Smartoptics Group has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

In Conclusion...

In summary, it's great to see that Smartoptics Group 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 staggering 153% to shareholders over the last year, it looks like investors are recognizing 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.

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 makes us a bit uncomfortable!) that you should know about.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.

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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.