iFabric (TSE:IFA) Is Reinvesting At Lower Rates Of Return

What trends should we look for it we want to identify stocks that can multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after investigating iFabric (TSE:IFA), we don't think it's current trends fit the mold of a multi-bagger.

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. Analysts use this formula to calculate it for iFabric:

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

0.033 = CA$760k ÷ (CA$26m - CA$3.6m) (Based on the trailing twelve months to March 2022).

So, 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 16%.

Check out our latest analysis for iFabric

Historical performance is a great place to start when researching a stock so above you can see the gauge for iFabric's ROCE against it's prior returns. If you're interested in investigating iFabric's past further, check out this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

When we looked at the ROCE trend at iFabric, we didn't gain much confidence. Around five years ago the returns on capital were 6.2%, but since then they've fallen to 3.3%. However it looks like iFabric 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 may take some time before the company starts to see any change in earnings from these investments.

Our Take On iFabric's ROCE

Bringing it all together, while we're somewhat encouraged by iFabric's reinvestment in its own business, we're aware that returns are shrinking. Since the stock has declined 31% over the last five years, investors may not be too optimistic on this trend improving either. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

On a final note, we found 5 warning signs for iFabric (2 can't be ignored) you should be aware of.

While iFabric isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.