Capital Allocation Trends At iFabric (TSE:IFA) Aren't Ideal

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding 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. Although, when we looked at iFabric (TSE:IFA), it didn't seem to tick all of these boxes.

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. The formula for this calculation on iFabric is:

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

0.033 = CA$790k ÷ (CA$27m - CA$2.6m) (Based on the trailing twelve months to June 2023).

Therefore, iFabric has an ROCE of 3.3%. In absolute terms, that's a low return and it also under-performs the Luxury industry average of 12%.

See our latest analysis for iFabric

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating iFabric's past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From iFabric's ROCE Trend?

On the surface, the trend of ROCE at iFabric doesn't inspire confidence. Around five years ago the returns on capital were 27%, but since then they've fallen to 3.3%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

The Bottom Line On iFabric's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that iFabric is reinvesting for growth and has higher sales as a result. However, despite the promising trends, the stock has fallen 45% over the last five years, so there might be an opportunity here for astute investors. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

On a final note, we've found 1 warning sign for iFabric that we think you should be aware of.

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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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.