If you’re looking for a multi-bagger, there’s a few things to keep an eye out for. Firstly, we’d want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it’s a business that is reinvesting profits at increasing rates of return. With that in mind, we’ve noticed some promising trends at O2Micro International (NASDAQ:OIIM) so let’s look a bit deeper.
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. Analysts use this formula to calculate it for O2Micro International:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.034 = US$2.8m ÷ (US$96m – US$14m) (Based on the trailing twelve months to September 2020).
So, O2Micro International has an ROCE of 3.4%. Ultimately, that’s a low return and it under-performs the Semiconductor industry average of 10%.
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 to see what analysts are forecasting going forward, you should check out our free report for O2Micro International.
What The Trend Of ROCE Can Tell Us
We’re delighted to see that O2Micro International is reaping rewards from its investments and has now broken into profitability. The company was generating losses five years ago, but has managed to turn it around and as we saw earlier is now earning 3.4%, which is always encouraging. While returns have increased, the amount of capital employed by O2Micro International has remained flat over the period. 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. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.
The Key Takeaway
To bring it all together, O2Micro International has done well to increase the returns it’s generating from its capital employed. And a remarkable 266% 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 final note, we’ve found 2 warning signs for O2Micro International that we think you should be aware of.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
This article by Simply Wall St is general in nature. 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.