There are a few key trends to look for if we want to identify the next multi-bagger. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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 on that note, OSI Systems (NASDAQ:OSIS) looks quite promising in regards to its trends of return on capital.

What Is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for OSI Systems:

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

0.17 = US$189m ÷ (US$1.9b - US$815m) (Based on the trailing twelve months to June 2024).

Therefore, OSI Systems has an ROCE of 17%. In absolute terms, that's a satisfactory return, but compared to the Electronic industry average of 10.0% it's much better.

View our latest analysis for OSI Systems

Above you can see how the current ROCE for OSI Systems 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 OSI Systems for free.

The Trend Of ROCE

Investors would be pleased with what's happening at OSI Systems. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 17%. Basically the business is earning more per dollar of capital invested and in addition to that, 27% more capital is being employed now too. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Essentially the business now has suppliers or short-term creditors funding about 42% of its operations, which isn't ideal. And with current liabilities at those levels, that's pretty high.

What We Can Learn From OSI Systems' ROCE

To sum it up, OSI Systems has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Since the stock has returned a solid 44% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. In light of that, we think it's worth looking further into this stock because if OSI Systems can keep these trends up, it could have a bright future ahead.

OSI Systems does have some risks, we noticed 3 warning signs (and 2 which make us uncomfortable) we think you should know about.

While OSI Systems may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.