InvoCare (ASX:IVC) Might Be Having Difficulty Using Its Capital Effectively

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after briefly looking over the numbers, we don't think InvoCare (ASX:IVC) 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 that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for InvoCare:

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

0.034 = AU$53m ÷ (AU$1.8b - AU$182m) (Based on the trailing twelve months to December 2020).

Therefore, InvoCare has an ROCE of 3.4%. In absolute terms, that's a low return and it also under-performs the Consumer Services industry average of 9.4%.

Check out our latest analysis for InvoCare

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

What The Trend Of ROCE Can Tell Us

The trend of ROCE doesn't look fantastic because it's fallen from 9.5% five years ago, while the business's capital employed increased by 75%. However, some of the increase in capital employed could be attributed to the recent capital raising that's been completed prior to their latest reporting period, so keep that in mind when looking at the ROCE decrease. It's unlikely that all of the funds raised have been put to work yet, so as a consequence InvoCare might not have received a full period of earnings contribution from it.

Our Take On InvoCare's ROCE

Bringing it all together, while we're somewhat encouraged by InvoCare's reinvestment in its own business, we're aware that returns are shrinking. And investors may be recognizing these trends since the stock has only returned a total of 7.6% to shareholders over the last five years. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

On a final note, we found 3 warning signs for InvoCare (1 doesn't sit too well with us) you should be aware of.

While InvoCare isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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