The Returns At ID Logistics Group (EPA:IDL) Provide Us With Signs Of What's To Come

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Having said that, from a first glance at ID Logistics Group (EPA:IDL) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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. Analysts use this formula to calculate it for ID Logistics Group:

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

0.082 = €53m ÷ (€1.2b - €559m) (Based on the trailing twelve months to June 2020).

Therefore, ID Logistics Group has an ROCE of 8.2%. On its own, that's a low figure but it's around the 9.1% average generated by the Logistics industry.

View 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 to see what analysts are forecasting going forward, you should check out our free report for ID Logistics Group.

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 20%, but since then they've fallen to 8.2%. 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 related note, ID Logistics Group has decreased its current liabilities to 46% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE. Keep in mind 46% is still pretty high, so those risks are still somewhat prevalent.

What We Can Learn From ID Logistics Group's ROCE

In summary, ID Logistics Group is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Although the market must be expecting these trends to improve because the stock has gained 41% over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

If you'd like to know about the risks facing ID Logistics Group, we've discovered 3 warning signs that you should be aware of.

While ID Logistics Group 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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