What are the early trends we should look for to identify a stock that could multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. So on that note, Optiva (TSE:OPT) looks quite promising in regards to its trends of return on capital.

Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Optiva is:

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

0.11 = US$7.1m ÷ (US$79m - US$16m) (Based on the trailing twelve months to March 2023).

Therefore, Optiva has an ROCE of 11%. In absolute terms, that's a satisfactory return, but compared to the Software industry average of 8.6% it's much better.

View our latest analysis for Optiva  roce

Above you can see how the current ROCE for Optiva 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 Optiva here  for free.

What Does the ROCE Trend For Optiva Tell Us?

We're delighted to see that Optiva is reaping rewards from its investments and has now broken into profitability. The company was generating losses five years ago, but now it's turned around, earning 11% which is no doubt a relief for some early shareholders. Additionally, the business is utilizing 29% less capital than it was five years ago, and taken at face value, that can mean the company needs less funds at work to get a return. Optiva could be selling under-performing assets since the ROCE is improving.

One more thing to note, Optiva has decreased current liabilities to 21% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance.

Our Take On Optiva's ROCE

In a nutshell, we're pleased to see that Optiva has been able to generate higher returns from less capital. And since the stock has dived 86% over the last five years, there may be other factors affecting the company's prospects. Still, it's worth doing some further research to see if the trends will continue into the future.

Optiva does have some risks, we noticed  2 warning signs  (and 1 which can't be ignored)  we think you should know about.

If you want to search for solid companies with great earnings, check out this freelist of companies with good balance sheets and impressive returns on equity.

Have feedback on this article? Concerned about the content?Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.

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