Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So, when we ran our eye over Omega Flex's (NASDAQ:OFLX) trend of ROCE, we really liked what we saw.
What Is 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 Omega Flex is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.48 = US$33m ÷ (US$89m - US$20m) (Based on the trailing twelve months to June 2022).
So, Omega Flex has an ROCE of 48%. That's a fantastic return and not only that, it outpaces the average of 10% earned by companies in a similar industry.
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 of past earnings, revenue and cash flow.
How Are Returns Trending?
It's hard not to be impressed by Omega Flex's returns on capital. The company has employed 31% more capital in the last five years, and the returns on that capital have remained stable at 48%. Now considering ROCE is an attractive 48%, this combination is actually pretty appealing because it means the business can consistently put money to work and generate these high returns. You'll see this when looking at well operated businesses or favorable business models.
What We Can Learn From Omega Flex's ROCE
Omega Flex has demonstrated its proficiency by generating high returns on increasing amounts of capital employed, which we're thrilled about. And the stock has followed suit returning a meaningful 50% to shareholders over the last five years. So even though the stock might be more "expensive" than it was before, we think the strong fundamentals warrant this stock for further research.
One more thing: We've identified 2 warning signs with Omega Flex (at least 1 which is a bit unpleasant) , and understanding these would certainly be useful.
If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.
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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.