There are a few key trends to look for if we want to identify the next multi-bagger. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So when we looked at OTS Holdings (Catalist:OTS) and its trend of ROCE, we really liked what we saw.
Understanding Return On Capital Employed (ROCE)
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. The formula for this calculation on OTS Holdings is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.036 = S$1.3m ÷ (S$39m - S$4.6m) (Based on the trailing twelve months to June 2022).
Therefore, OTS Holdings has an ROCE of 3.6%. In absolute terms, that's a low return and it also under-performs the Food industry average of 11%.
Check out our latest analysis for OTS Holdings
Historical performance is a great place to start when researching a stock so above you can see the gauge for OTS Holdings' ROCE against it's prior returns. If you're interested in investigating OTS Holdings' past further, check out this free graph of past earnings, revenue and cash flow.
What Does the ROCE Trend For OTS Holdings Tell Us?
We're glad to see that ROCE is heading in the right direction, even if it is still low at the moment. The data shows that returns on capital have increased substantially over the last four years to 3.6%. The amount of capital employed has increased too, by 83%. So we're very much inspired by what we're seeing at OTS Holdings thanks to its ability to profitably reinvest capital.
Our Take On OTS Holdings' ROCE
In summary, it's great to see that OTS Holdings can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. And since the stock has fallen 31% over the last year, there might be an opportunity here. That being the case, research into the company's current valuation metrics and future prospects seems fitting.
If you'd like to know more about OTS Holdings, we've spotted 3 warning signs, and 1 of them makes us a bit uncomfortable.
While OTS Holdings 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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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.
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