If you're looking for a multi-bagger, there's a few things to keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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 briefly looking over the numbers, we don't think IBI Group (TSE:IBG) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
Understanding 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. To calculate this metric for IBI Group, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.19 = CA$39m ÷ (CA$325m - CA$117m) (Based on the trailing twelve months to September 2020).
Therefore, IBI Group has an ROCE of 19%. On its own, that's a standard return, however it's much better than the 7.9% generated by the Professional Services industry.
View our latest analysis for IBI Group
Above you can see how the current ROCE for IBI Group 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 IBI Group here for free.
What Does the ROCE Trend For IBI Group Tell Us?
On the surface, the trend of ROCE at IBI Group doesn't inspire confidence. To be more specific, ROCE has fallen from 36% over the last five years. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.
On a related note, IBI Group has decreased its current liabilities to 36% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.Our Take On IBI Group's ROCE
In summary, IBI Group is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 241% gain to shareholders who have held over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.
On a separate note, we've found 1 warning sign for IBI Group you'll probably want to know about.
While IBI 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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About TSX:IBG
IBI Group
IBI Group Inc. provides various professional services in Canada, the United States, the United Kingdom, and internationally.
Outstanding track record with excellent balance sheet.
