Be Wary Of IBU-tec advanced materials (ETR:IBU) And Its Returns On Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding 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. Although, when we looked at IBU-tec advanced materials (ETR:IBU), it didn't seem to tick all of these boxes.

What Is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on IBU-tec advanced materials is:

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

0.0018 = €120k ÷ (€77m - €9.5m) (Based on the trailing twelve months to December 2021).

Therefore, IBU-tec advanced materials has an ROCE of 0.2%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 12%.

View our latest analysis for IBU-tec advanced materials

In the above chart we have measured IBU-tec advanced materials' prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Can We Tell From IBU-tec advanced materials' ROCE Trend?

In terms of IBU-tec advanced materials' historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 0.2% from 20% five years ago. 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. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

What We Can Learn From IBU-tec advanced materials' ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for IBU-tec advanced materials. And the stock has followed suit returning a meaningful 59% to shareholders over the last five years. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

One more thing to note, we've identified 1 warning sign with IBU-tec advanced materials and understanding this should be part of your investment process.

While IBU-tec advanced materials 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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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.