What We Make Of Imaflex's (CVE:IFX) Returns On Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. Speaking of which, we noticed some great changes in Imaflex's (CVE:IFX) returns on capital, so let's have a look.

Return On Capital Employed (ROCE): What is it?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Imaflex, this is the formula:

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%. In absolute terms, that's a satisfactory return, but compared to the Packaging industry average of 12% it's much better.

Check out our latest analysis for Imaflex

In the above chart we have measured Imaflex's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Imaflex here for free.

What The Trend Of ROCE Can Tell Us

The trends we've noticed at Imaflex are quite reassuring. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 17%. The amount of capital employed has increased too, by 67%. So we're very much inspired by what we're seeing at Imaflex thanks to its ability to profitably reinvest capital.

On a related note, the company's ratio of current liabilities to total assets has decreased to 22%, which basically reduces it's funding from the likes of short-term creditors or suppliers. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance.

The Key Takeaway

In summary, it's great to see that Imaflex can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. And a remarkable 163% total return over the last five years tells us that investors are expecting more good things to come in the future. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

Imaflex does have some risks though, and we've spotted 3 warning signs for Imaflex that you might be interested in.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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