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There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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 Syntec Optics Holdings' (NASDAQ:OPTX) returns on capital, so let's have a look.
Return On Capital Employed (ROCE): What Is It?
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. Analysts use this formula to calculate it for Syntec Optics Holdings:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.039 = US$500k ÷ (US$23m - US$11m) (Based on the trailing twelve months to June 2023).
Thus, Syntec Optics Holdings has an ROCE of 3.9%. In absolute terms, that's a low return and it also under-performs the Electronic industry average of 11%.
View our latest analysis for Syntec Optics Holdings
Historical performance is a great place to start when researching a stock so above you can see the gauge for Syntec Optics Holdings' ROCE against it's prior returns. If you'd like to look at how Syntec Optics Holdings has performed in the past in other metrics, you can view this free graph of Syntec Optics Holdings' past earnings, revenue and cash flow.
The Trend Of ROCE
It's nice to see that ROCE is headed in the right direction, even if it is still relatively low. We found that the returns on capital employed over the last one year have risen by 46%. That's not bad because this tells for every dollar invested (capital employed), the company is increasing the amount earned from that dollar. In regards to capital employed, Syntec Optics Holdings appears to been achieving more with less, since the business is using 25% less capital to run its operation. A business that's shrinking its asset base like this isn't usually typical of a soon to be multi-bagger company.
On a separate but related note, it's important to know that Syntec Optics Holdings has a current liabilities to total assets ratio of 45%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.