Imaflex (CVE:IFX) Shareholders Will Want The ROCE Trajectory To Continue

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So when we looked at Imaflex (CVE:IFX) and its trend of ROCE, we really liked what we saw.

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 Imaflex:

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

0.17 = CA$7.3m ÷ (CA$55m - CA$12m) (Based on the trailing twelve months to September 2020).

Thus, Imaflex has an ROCE of 17%. On its own, that's a standard return, however it's much better than the 13% generated by the Packaging industry.

View our latest analysis for Imaflex

Above you can see how the current ROCE for Imaflex 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 Imaflex here for free.

So How Is Imaflex's ROCE Trending?

Investors would be pleased with what's happening at Imaflex. Over the last five years, returns on capital employed have risen substantially to 17%. Basically the business is earning more per dollar of capital invested and in addition to that, 67% more capital is being employed now too. So we're very much inspired by what we're seeing at Imaflex thanks to its ability to profitably reinvest capital.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 22%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books.

What We Can Learn From Imaflex's ROCE

To sum it up, Imaflex has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And a remarkable 228% total return over the last five years tells us that investors are expecting more good things to come in the future. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

If you want to continue researching Imaflex, you might be interested to know about the 1 warning sign that our analysis has discovered.

While Imaflex 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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