There Are Reasons To Feel Uneasy About InvoCare's (ASX:IVC) Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Having said that, from a first glance at InvoCare (ASX:IVC) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What is Return On Capital Employed (ROCE)?

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 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 10%.

View our latest analysis for InvoCare

In the above chart we have measured InvoCare's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for InvoCare.

How Are Returns Trending?

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. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with InvoCare's earnings and if they change as a result from the capital raise.

The Bottom Line 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 2.4% to shareholders over the last five years. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

If you'd like to know about the risks facing InvoCare, we've discovered 1 warning sign that you should be aware of.

While InvoCare 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. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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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