Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at ILPRA (BIT:ILP) and its ROCE trend, we weren't exactly thrilled.
Return On Capital Employed (ROCE): What is it?
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. Analysts use this formula to calculate it for ILPRA:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.094 = €2.3m ÷ (€42m - €17m) (Based on the trailing twelve months to December 2019).
Therefore, ILPRA has an ROCE of 9.4%. On its own that's a low return, but compared to the average of 6.1% generated by the Machinery industry, it's much better.
View our latest analysis for ILPRA
In the above chart we have a measured ILPRA's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering ILPRA here for free.
What The Trend Of ROCE Can Tell Us
In terms of ILPRA's historical ROCE trend, it doesn't exactly demand attention. Over the past three years, ROCE has remained relatively flat at around 9.4% and the business has deployed 62% more capital into its operations. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.
Another thing to note, ILPRA has a high ratio of current liabilities to total assets of 41%. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.What We Can Learn From ILPRA's ROCE
In conclusion, ILPRA has been investing more capital into the business, but returns on that capital haven't increased. And investors appear hesitant that the trends will pick up because the stock has fallen 11% in the last year. Therefore based on the analysis done in this article, we don't think ILPRA has the makings of a multi-bagger.
If you'd like to know more about ILPRA, we've spotted 4 warning signs, and 2 of them make us uncomfortable.
While ILPRA 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. 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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About BIT:ILP
ILPRA
Engages in the design, production, and sale of packaging machines worldwide.
Very undervalued with high growth potential.
Market Insights
Weekly Picks
Early mover in a fast growing industry. Likely to experience share price volatility as they scale
A case for CA$31.80 (undiluted), aka 8,616% upside from CA$0.37 (an 86 bagger!).
Moderation and Stabilisation: HOLD: Fair Price based on a 4-year Cycle is $12.08
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