Returns On Capital At IBU-tec advanced materials (ETR:IBU) Paint A Concerning Picture

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think IBU-tec advanced materials (ETR:IBU) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. Analysts use this formula to calculate it for IBU-tec advanced materials:

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

0.012 = €974k ÷ (€82m - €2.6m) (Based on the trailing twelve months to June 2023).

Therefore, IBU-tec advanced materials has an ROCE of 1.2%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 9.0%.

See our latest analysis for IBU-tec advanced materials

Above you can see how the current ROCE for IBU-tec advanced materials 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 IBU-tec advanced materials here for free.

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. To be more specific, ROCE has fallen from 2.2% over the last five years. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

Our Take On IBU-tec advanced materials' ROCE

Bringing it all together, while we're somewhat encouraged by IBU-tec advanced materials' reinvestment in its own business, we're aware that returns are shrinking. And in the last five years, the stock has given away 15% so the market doesn't look too hopeful on these trends strengthening any time soon. Therefore based on the analysis done in this article, we don't think IBU-tec advanced materials has the makings of a multi-bagger.

One more thing: We've identified 3 warning signs with IBU-tec advanced materials (at least 2 which are potentially serious) , and understanding them would certainly be useful.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.