Be Wary Of Imdex (ASX:IMD) And Its Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after investigating Imdex (ASX:IMD), we don't think it's current trends fit the mold of a multi-bagger.

What Is Return On Capital Employed (ROCE)?

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 Imdex:

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

0.10 = AU$72m ÷ (AU$808m - AU$98m) (Based on the trailing twelve months to December 2024).

So, Imdex has an ROCE of 10%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Metals and Mining industry average of 8.5%.

Check out our latest analysis for Imdex

In the above chart we have measured Imdex'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 analyst report for Imdex .

What Does the ROCE Trend For Imdex Tell Us?

When we looked at the ROCE trend at Imdex, we didn't gain much confidence. To be more specific, ROCE has fallen from 15% over the last five years. However it looks like Imdex 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.

The Key Takeaway

To conclude, we've found that Imdex is reinvesting in the business, but returns have been falling. Yet to long term shareholders the stock has gifted them an incredible 222% return in the last five years, so the market appears to be rosy about its future. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

Imdex could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation for IMD on our platform quite valuable.

While Imdex 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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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.