To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. Ergo, when we looked at the ROCE trends at IMI (LON:IMI), we liked what we saw.
Understanding Return On Capital Employed (ROCE)
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested 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)
0.23 = UK£385m ÷ (UK£2.6b - UK£886m) (Based on the trailing twelve months to June 2024).
Thus, IMI has an ROCE of 23%. That's a fantastic return and not only that, it outpaces the average of 14% earned by companies in a similar industry.
See our latest analysis for IMI
Above you can see how the current ROCE for IMI compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for IMI .
How Are Returns Trending?
It's hard not to be impressed by IMI's returns on capital. The company has employed 33% more capital in the last five years, and the returns on that capital have remained stable at 23%. With returns that high, it's great that the business can continually reinvest its money at such appealing rates of return. You'll see this when looking at well operated businesses or favorable business models.
Our Take On IMI's ROCE
In summary, we're delighted to see that IMI has been compounding returns by reinvesting at consistently high rates of return, as these are common traits of a multi-bagger. Therefore it's no surprise that shareholders have earned a respectable 91% return if they held over the last five years. So even though the stock might be more "expensive" than it was before, we think the strong fundamentals warrant this stock for further research.
If you'd like to know about the risks facing IMI, we've discovered 1 warning sign that you should be aware of.
IMI is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.
New: AI Stock Screener & Alerts
Our new AI Stock Screener scans the market every day to uncover opportunities.
• Dividend Powerhouses (3%+ Yield)
• Undervalued Small Caps with Insider Buying
• High growth Tech and AI Companies
Or build your own from over 50 metrics.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.
About LSE:IMI
IMI
An engineering company, engages in the design, manufacturing, and servicing of engineering products in the United Kingdom, Germany, rest of Europe, the United States, rest of the Americas, China, rest of the Asia Pacific, the Middle East, and Africa.
Solid track record with excellent balance sheet.
