ID Logistics Group (EPA:IDL) Is Reinvesting At Lower Rates Of Return

What trends should we look for it we want to identify stocks that can 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at ID Logistics Group (EPA:IDL) and its ROCE trend, we weren't exactly thrilled.

Understanding 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 ID Logistics Group is:

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

0.089 = €59m ÷ (€1.3b - €594m) (Based on the trailing twelve months to December 2020).

Thus, ID Logistics Group has an ROCE of 8.9%. Ultimately, that's a low return and it under-performs the Logistics industry average of 12%.

Check out our latest analysis for ID Logistics Group

Above you can see how the current ROCE for ID Logistics Group 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 ID Logistics Group here for free.

What Can We Tell From ID Logistics Group's ROCE Trend?

When we looked at the ROCE trend at ID Logistics Group, we didn't gain much confidence. Around five years ago the returns on capital were 19%, but since then they've fallen to 8.9%. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a side note, ID Logistics Group has done well to pay down its current liabilities to 47% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money. Either way, they're still at a pretty high level, so we'd like to see them fall further if possible.

The Bottom Line On ID Logistics Group's ROCE

To conclude, we've found that ID Logistics Group is reinvesting in the business, but returns have been falling. Since the stock has gained an impressive 85% over the last five years, investors must think there's better things to come. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

ID Logistics Group does have some risks though, and we've spotted 1 warning sign for ID Logistics Group that you might be interested in.

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