There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we’d want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. However, after investigating IG Design Group (LON:IGR), we don’t think it’s current trends fit the mold of a multi-bagger.
What is Return On Capital Employed (ROCE)?
If you haven’t worked with ROCE before, it measures the ‘return’ (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for IG Design Group, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.072 = UK£27m ÷ (UK£560m – UK£182m) (Based on the trailing twelve months to March 2020).
Thus, IG Design Group has an ROCE of 7.2%. Ultimately, that’s a low return and it under-performs the Consumer Durables industry average of 11%.
In the above chart we have measured IG Design Group’s prior ROCE against its prior performance, but the future is arguably more important. If you’re interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
So How Is IG Design Group’s ROCE Trending?
Unfortunately, the trend isn’t great with ROCE falling from 12% five years ago, while capital employed has grown 314%. Usually this isn’t ideal, but given IG Design Group conducted a capital raising before their most recent earnings announcement, that would’ve likely contributed, at least partially, to the increased capital employed figure. It’s unlikely that all of the funds raised have been put to work yet, so as a consequence IG Design Group might not have received a full period of earnings contribution from it. Additionally, we found that IG Design Group’s most recent EBIT figure is around the same as the prior year, so we’d attribute the drop in ROCE mostly to the capital raise.
While returns have fallen for IG Design Group in recent times, we’re encouraged to see that sales are growing and that the business is reinvesting in its operations. And long term investors must be optimistic going forward because the stock has returned a huge 263% to shareholders in the last five years. So should these growth trends continue, we’d be optimistic on the stock going forward.
If you’d like to know about the risks facing IG Design Group, we’ve discovered 4 warning signs that you should be aware of.
While IG Design Group 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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