InvoCare (ASX:IVC) Will Want To Turn Around Its Return Trends

By
Simply Wall St
Published
January 06, 2022
ASX:IVC
Source: Shutterstock

What are the early trends we should look for to identify a stock that could multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after investigating InvoCare (ASX:IVC), 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 InvoCare, this is the formula:

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

0.041 = AU$67m ÷ (AU$1.8b - AU$180m) (Based on the trailing twelve months to June 2021).

Thus, InvoCare has an ROCE of 4.1%. Ultimately, that's a low return and it under-performs the Consumer Services industry average of 10%.

View our latest analysis for InvoCare

roce
ASX:IVC Return on Capital Employed January 6th 2022

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're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

So How Is InvoCare's ROCE Trending?

In terms of InvoCare's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 9.3%, but since then they've fallen to 4.1%. However it looks like InvoCare might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

What We Can Learn From InvoCare's ROCE

In summary, InvoCare is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Additionally, the stock's total return to shareholders over the last five years has been flat, which isn't too surprising. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

While InvoCare doesn't shine too bright in this respect, it's still worth seeing if the company is trading at attractive prices. You can find that out with our FREE intrinsic value estimation on our platform.

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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