A Look Into OEM International's (STO:OEM B) Impressive Returns On Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. That's why when we briefly looked at OEM International's (STO:OEM B) ROCE trend, we were very happy with 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. The formula for this calculation on OEM International is:

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

0.31 = kr755m ÷ (kr3.1b - kr706m) (Based on the trailing twelve months to March 2024).

So, OEM International has an ROCE of 31%. In absolute terms that's a great return and it's even better than the Trade Distributors industry average of 13%.

Check out our latest analysis for OEM International

Historical performance is a great place to start when researching a stock so above you can see the gauge for OEM International's ROCE against it's prior returns. If you'd like to look at how OEM International has performed in the past in other metrics, you can view this free graph of OEM International's past earnings, revenue and cash flow.

So How Is OEM International's ROCE Trending?

It's hard not to be impressed by OEM International's returns on capital. The company has consistently earned 31% for the last five years, and the capital employed within the business has risen 107% in that time. With returns that high, it's great that the business can continually reinvest its money at such appealing rates of return. If these trends can continue, it wouldn't surprise us if the company became a multi-bagger.

The Bottom Line On OEM International's ROCE

In summary, we're delighted to see that OEM International has been compounding returns by reinvesting at consistently high rates of return, as these are common traits of a multi-bagger. And the stock has done incredibly well with a 274% return over the last five years, so long term investors are no doubt ecstatic with that result. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.

If you want to continue researching OEM International, you might be interested to know about the 1 warning sign that our analysis has discovered.

OEM International is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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.