There are a few key trends to look for if we want to identify the next multi-bagger. Amongst other things, we’ll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company’s amount of capital employed. Ultimately, this demonstrates that it’s a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don’t think Ebix (NASDAQ:EBIX) has the makings of a multi-bagger going forward, but let’s have a look at why that may be.
Return On Capital Employed (ROCE): What is it?
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 Ebix:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.094 = US$124m ÷ (US$1.5b – US$198m) (Based on the trailing twelve months to June 2020).
Therefore, Ebix has an ROCE of 9.4%. Even though it’s in line with the industry average of 9.2%, it’s still a low return by itself.
Above you can see how the current ROCE for Ebix compares to its prior returns on capital, but there’s only so much you can tell from the past. If you’d like to see what analysts are forecasting going forward, you should check out our free report for Ebix.
What Can We Tell From Ebix’s ROCE Trend?
In terms of Ebix’s historical ROCE movements, the trend isn’t fantastic. Over the last five years, returns on capital have decreased to 9.4% from 13% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.
The Key Takeaway
Bringing it all together, while we’re somewhat encouraged by Ebix’s reinvestment in its own business, we’re aware that returns are shrinking. And in the last five years, the stock has given away 26% so the market doesn’t look too hopeful on these trends strengthening any time soon. In any case, the stock doesn’t have these traits of a multi-bagger discussed above, so if that’s what you’re looking for, we think you’d have more luck elsewhere.
If you want to know some of the risks facing Ebix we’ve found 3 warning signs (1 doesn’t sit too well with us!) that you should be aware of before investing here.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
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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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