Capital Investments At Ocean Bio-Chem (NASDAQ:OBCI) Point To A Promising Future

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. So, when we ran our eye over Ocean Bio-Chem's (NASDAQ:OBCI) trend of ROCE, we really liked what we saw.

Understanding 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 Ocean Bio-Chem is:

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

0.20 = US$11m ÷ (US$60m - US$4.7m) (Based on the trailing twelve months to December 2021).

Therefore, Ocean Bio-Chem has an ROCE of 20%. In absolute terms that's a very respectable return and compared to the Household Products industry average of 17% it's pretty much on par.

View our latest analysis for Ocean Bio-Chem

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Ocean Bio-Chem's past further, check out this free graph of past earnings, revenue and cash flow.

So How Is Ocean Bio-Chem's ROCE Trending?

It's hard not to be impressed by Ocean Bio-Chem's returns on capital. Over the past five years, ROCE has remained relatively flat at around 20% and the business has deployed 144% more capital into its operations. 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 Key Takeaway

Ocean Bio-Chem has demonstrated its proficiency by generating high returns on increasing amounts of capital employed, which we're thrilled about. Therefore it's no surprise that shareholders have earned a respectable 83% return if they held over the last five years. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.

Ocean Bio-Chem does have some risks, we noticed 3 warning signs (and 1 which is a bit unpleasant) we think you should know about.

Ocean Bio-Chem 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.