Some Investors May Be Worried About Omega Flex's (NASDAQ:OFLX) Returns On Capital

If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. This indicates the company is producing less profit from its investments and its total assets are decreasing. And from a first read, things don't look too good at Omega Flex (NASDAQ:OFLX), so let's see why.

What Is 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. To calculate this metric for Omega Flex, this is the formula:

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

0.28 = US$24m ÷ (US$99m - US$14m) (Based on the trailing twelve months to March 2024).

Therefore, Omega Flex has an ROCE of 28%. That's a fantastic return and not only that, it outpaces the average of 13% earned by companies in a similar industry.

View our latest analysis for Omega Flex

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

The Trend Of ROCE

In terms of Omega Flex's historical ROCE movements, the trend doesn't inspire confidence. About five years ago, returns on capital were 36%, however they're now substantially lower than that as we saw above. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Omega Flex becoming one if things continue as they have.

The Bottom Line

In summary, it's unfortunate that Omega Flex is generating lower returns from the same amount of capital. Long term shareholders who've owned the stock over the last five years have experienced a 20% depreciation in their investment, so it appears the market might not like these trends either. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

If you're still interested in Omega Flex it's worth checking out our FREE intrinsic value approximation for OFLX to see if it's trading at an attractive price in other respects.

Omega Flex 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.

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