Did you know there are some financial metrics that can provide clues of a potential 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. That's why when we briefly looked at Optex Systems Holdings' (NASDAQ:OPXS) ROCE trend, we were very happy with what we saw.

What Is 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. Analysts use this formula to calculate it for Optex Systems Holdings:

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

0.23 = US$4.4m ÷ (US$24m - US$4.7m) (Based on the trailing twelve months to March 2024).

Therefore, Optex Systems Holdings has an ROCE of 23%. That's a fantastic return and not only that, it outpaces the average of 11% earned by companies in a similar industry.

Check out our latest analysis for Optex Systems Holdings

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 Optex Systems Holdings has performed in the past in other metrics, you can view this free graph of Optex Systems Holdings' past earnings, revenue and cash flow.

What Can We Tell From Optex Systems Holdings' ROCE Trend?

It's hard not to be impressed by Optex Systems Holdings' returns on capital. The company has consistently earned 23% for the last five years, and the capital employed within the business has risen 66% in that time. With returns that high, it's great that the business can continually reinvest its money at such appealing rates of return. If these trends can continue, it wouldn't surprise us if the company became a multi-bagger.

In Conclusion...

Optex Systems Holdings has demonstrated its proficiency by generating high returns on increasing amounts of capital employed, which we're thrilled about. On top of that, the stock has rewarded shareholders with a remarkable 301% return to those who've held over the last five years. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.

Optex Systems Holdings does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those makes us a bit uncomfortable...