O2Micro International (NASDAQ:OIIM) Is Experiencing Growth In Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So on that note, O2Micro International (NASDAQ:OIIM) looks quite promising in regards to its trends of return on capital.

Return On Capital Employed (ROCE): What is it?

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 O2Micro International is:

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

0.13 = US$12m ÷ (US$112m - US$17m) (Based on the trailing twelve months to June 2021).

Thus, O2Micro International has an ROCE of 13%. That's a relatively normal return on capital, and it's around the 12% generated by the Semiconductor industry.

View our latest analysis for O2Micro International

Above you can see how the current ROCE for O2Micro International compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering O2Micro International here for free.

What Does the ROCE Trend For O2Micro International Tell Us?

O2Micro International has broken into the black (profitability) and we're sure it's a sight for sore eyes. The company now earns 13% on its capital, because five years ago it was incurring losses. On top of that, what's interesting is that the amount of capital being employed has remained steady, so the business hasn't needed to put any additional money to work to generate these higher returns. So while we're happy that the business is more efficient, just keep in mind that could mean that going forward the business is lacking areas to invest internally for growth. Because in the end, a business can only get so efficient.

Our Take On O2Micro International's ROCE

As discussed above, O2Micro International appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. And a remarkable 305% total return over the last five years tells us that investors are expecting more good things to come in the future. 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.

On a separate note, we've found 1 warning sign for O2Micro International you'll probably want to know about.

While O2Micro International may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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