There are a few key trends to look for if we want to identify the next multi-bagger. 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 looked at O2Micro International (NASDAQ:OIIM) and its trend of ROCE, we really liked what we saw.
Return On Capital Employed (ROCE): What is it?
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for O2Micro International, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.064 = US$5.5m ÷ (US$102m - US$15m) (Based on the trailing twelve months to December 2020).
So, O2Micro International has an ROCE of 6.4%. In absolute terms, that's a low return and it also under-performs the Semiconductor industry average of 10%.
In the above chart we have measured O2Micro International's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering O2Micro International here for free.
The Trend Of ROCE
O2Micro International has broken into the black (profitability) and we're sure it's a sight for sore eyes. While the business was unprofitable in the past, it's now turned things around and is earning 6.4% on its capital. 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.
The Bottom Line On O2Micro International's ROCE
To bring it all together, O2Micro International has done well to increase the returns it's generating from its capital employed. Since the stock has returned a staggering 589% to shareholders over the last five years, it looks like investors are recognizing these changes. 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.
One more thing, we've spotted 2 warning signs facing O2Micro International that you might find interesting.
While O2Micro International isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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