If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So, when we ran our eye over Objective's (ASX:OCL) trend of ROCE, we really liked what we saw.

Understanding 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. To calculate this metric for Objective, this is the formula:

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

0.42 = AU$24m ÷ (AU$110m - AU$52m) (Based on the trailing twelve months to December 2021).

So, Objective has an ROCE of 42%.  In absolute terms that's a great return and it's even better than the Software industry average of 11%.

See our latest analysis for Objective  roce

Above you can see how the current ROCE for Objective compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our freereport on analyst forecasts for the company.

So How Is Objective's ROCE Trending?

We'd be pretty happy with returns on capital like Objective. The company has consistently earned 42% for the last five years, and the capital employed within the business has risen 162% in that time. Returns like this are the envy of most businesses and given it has repeatedly reinvested at these rates, that's even better. If these trends can continue, it wouldn't surprise us if the company became a multi-bagger.

On a side note, Objective's current liabilities are still rather high at 48% of total assets. 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.



The Bottom Line

In summary, we're delighted to see that Objective has been compounding returns by reinvesting at consistently high rates of return, as these are common traits of a multi-bagger. And long term investors would be thrilled with the 577% return they've received over the last five years. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.

Objective does have some risks though, and we've spotted  1 warning sign for Objective that you might be interested in.

If you want to search for more stocks that have been earning high returns, check out this freelist of stocks with solid balance sheets that are also earning high returns on equity.

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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.