If you're looking for a multi-bagger, there's a few things to keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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 while Omega Flex (NASDAQ:OFLX) has a high ROCE right now, lets see what we can decipher from how returns are changing.

What Is Return On Capital Employed (ROCE)?

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. Analysts use this formula to calculate it for Omega Flex:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.24 = US$22m ÷ (US$106m - US$17m) (Based on the trailing twelve months to December 2024).

Therefore, Omega Flex has an ROCE of 24%. In absolute terms that's a great return and it's even better than the Machinery industry average of 12%.

View our latest analysis for Omega Flex

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Omega Flex has performed in the past in other metrics, you can view this free graph of Omega Flex's past earnings, revenue and cash flow.

The Trend Of ROCE

When we looked at the ROCE trend at Omega Flex, we didn't gain much confidence. While it's comforting that the ROCE is high, five years ago it was 54%. However it looks like Omega Flex 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's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a side note, Omega Flex has done well to pay down its current liabilities to 16% 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.

The Bottom Line

To conclude, we've found that Omega Flex is reinvesting in the business, but returns have been falling. And in the last five years, the stock has given away 52% so the market doesn't look too hopeful on these trends strengthening any time soon. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.