Optical Cable (NASDAQ:OCC) Might Have The Makings Of A Multi-Bagger
What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. Speaking of which, we noticed some great changes in Optical Cable's (NASDAQ:OCC) returns on capital, so let's have a look.
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 Optical Cable is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.089 = US$3.4m ÷ (US$46m - US$7.7m) (Based on the trailing twelve months to April 2023).
So, Optical Cable has an ROCE of 8.9%. In absolute terms, that's a low return but it's around the Communications industry average of 9.9%.
See our latest analysis for Optical Cable
Historical performance is a great place to start when researching a stock so above you can see the gauge for Optical Cable's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Optical Cable, check out these free graphs here.
What Can We Tell From Optical Cable's ROCE Trend?
Optical Cable is showing promise given that its ROCE is trending up and to the right. More specifically, while the company has kept capital employed relatively flat over the last five years, the ROCE has climbed 461% in that same time. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.
In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 17%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. This tells us that Optical Cable has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.
Our Take On Optical Cable's ROCE
To bring it all together, Optical Cable has done well to increase the returns it's generating from its capital employed. And given the stock has remained rather flat over the last five years, there might be an opportunity here if other metrics are strong. With that in mind, we believe the promising trends warrant this stock for further investigation.
Optical Cable does have some risks, we noticed 3 warning signs (and 1 which can't be ignored) we think you should know about.
While Optical Cable isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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.
Join A Paid User Research Session
You’ll receive a US$30 Amazon Gift card for 1 hour of your time while helping us build better investing tools for the individual investors like yourself. Sign up here
