Stock Analysis

IMI (LON:IMI) Could Be Struggling To Allocate Capital

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LSE:IMI
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If you're looking for a multi-bagger, there's a few things to keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after briefly looking over the numbers, we don't think IMI (LON:IMI) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on IMI is:

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

0.18 = UK£304m ÷ (UK£2.4b - UK£761m) (Based on the trailing twelve months to June 2022).

Therefore, IMI has an ROCE of 18%. On its own, that's a standard return, however it's much better than the 11% generated by the Machinery industry.

Check out our latest analysis for IMI

roce
LSE:IMI Return on Capital Employed September 4th 2022

In the above chart we have measured IMI's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for IMI.

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at IMI doesn't inspire confidence. Over the last five years, returns on capital have decreased to 18% from 24% five years ago. However it looks like IMI might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. 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.

Our Take On IMI's ROCE

Bringing it all together, while we're somewhat encouraged by IMI's reinvestment in its own business, we're aware that returns are shrinking. And investors may be recognizing these trends since the stock has only returned a total of 13% to shareholders over the last five years. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

If you want to continue researching IMI, you might be interested to know about the 2 warning signs that our analysis has discovered.

While IMI 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.

Valuation is complex, but we're helping make it simple.

Find out whether IMI is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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About LSE:IMI

IMI

IMI plc, a specialist engineering company, designs, manufactures, and services engineered products worldwide.

The Snowflake is a visual investment summary with the score of each axis being calculated by 6 checks in 5 areas.

Analysis AreaScore (0-6)
Valuation2
Future Growth2
Past Performance6
Financial Health4
Dividends2

Read more about these checks in the individual report sections or in our analysis model.

Outstanding track record with adequate balance sheet.