IBU-tec advanced materials' (ETR:IBU) Returns On Capital Not Reflecting Well On The Business

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after investigating IBU-tec advanced materials (ETR:IBU), we don't think it's current trends fit the mold of a multi-bagger.

Return On Capital Employed (ROCE): What Is It?

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. To calculate this metric for IBU-tec advanced materials, this is the formula:

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

0.035 = €2.4m ÷ (€77m - €7.0m) (Based on the trailing twelve months to June 2022).

So, IBU-tec advanced materials has an ROCE of 3.5%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 11%.

Check out the opportunities and risks within the DE Chemicals industry.

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'd like, you can check out the forecasts from the analysts covering IBU-tec advanced materials here for free.

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

On the surface, the trend of ROCE at IBU-tec advanced materials doesn't inspire confidence. Around five years ago the returns on capital were 5.0%, but since then they've fallen to 3.5%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

The Key Takeaway

In summary, despite lower returns in the short term, we're encouraged to see that IBU-tec advanced materials is reinvesting for growth and has higher sales as a result. Furthermore the stock has climbed 96% over the last five years, it would appear that investors are upbeat about the future. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

Like most companies, IBU-tec advanced materials does come with some risks, and we've found 2 warning signs that you should be aware of.

While IBU-tec advanced materials may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.