There are a few key trends to look for if we want to identify the next multi-bagger. 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Although, when we looked at OPT Machine Vision Tech (SHSE:688686), it didn't seem to tick all of these boxes.
Understanding 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. To calculate this metric for OPT Machine Vision Tech, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.079 = CN¥231m ÷ (CN¥3.1b - CN¥196m) (Based on the trailing twelve months to September 2023).
Thus, OPT Machine Vision Tech has an ROCE of 7.9%. On its own that's a low return, but compared to the average of 5.0% generated by the Electronic industry, it's much better.
Check out our latest analysis for OPT Machine Vision Tech
Above you can see how the current ROCE for OPT Machine Vision Tech 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 OPT Machine Vision Tech here for free.
What The Trend Of ROCE Can Tell Us
When we looked at the ROCE trend at OPT Machine Vision Tech, we didn't gain much confidence. Around five years ago the returns on capital were 43%, but since then they've fallen to 7.9%. However it looks like OPT Machine Vision Tech might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.
On a side note, OPT Machine Vision Tech has done well to pay down its current liabilities to 6.3% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.
In Conclusion...
To conclude, we've found that OPT Machine Vision Tech is reinvesting in the business, but returns have been falling. And investors appear hesitant that the trends will pick up because the stock has fallen 64% in the last three years. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.
OPT Machine Vision Tech does have some risks though, and we've spotted 2 warning signs for OPT Machine Vision Tech that you might be interested in.
While OPT Machine Vision Tech 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.
