Stock Analysis

Intertek Group (LON:ITRK) Has Some Way To Go To Become A Multi-Bagger

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LSE:ITRK
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If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. So while Intertek Group (LON:ITRK) has a high ROCE right now, lets see what we can decipher from how returns are changing.

Return On Capital Employed (ROCE): What is it?

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 Intertek Group is:

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

0.24 = UK£437m ÷ (UK£2.6b - UK£794m) (Based on the trailing twelve months to June 2021).

Therefore, Intertek Group has an ROCE of 24%. In absolute terms that's a great return and it's even better than the Professional Services industry average of 12%.

View our latest analysis for Intertek Group

roce
LSE:ITRK Return on Capital Employed July 31st 2021

In the above chart we have measured Intertek Group'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 Intertek Group.

What Can We Tell From Intertek Group's ROCE Trend?

Things have been pretty stable at Intertek Group, with its capital employed and returns on that capital staying somewhat the same for the last five years. This tells us the company isn't reinvesting in itself, so it's plausible that it's past the growth phase. So while the current operations are delivering respectable returns, unless capital employed increases we'd be hard-pressed to believe it's a multi-bagger going forward. With fewer investment opportunities, it makes sense that Intertek Group has been paying out a decent 52% of its earnings to shareholders. Unless businesses have highly compelling growth opportunities, they'll typically return some money to shareholders.

The Key Takeaway

Although is allocating it's capital efficiently to generate impressive returns, it isn't compounding its base of capital, which is what we'd see from a multi-bagger. Since the stock has gained an impressive 62% 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.

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

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.

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