Stock Analysis

Returns On Capital At Intertek Group (LON:ITRK) Have Hit The Brakes

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There are a few key trends to look for if we want to identify the next multi-bagger. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, while the ROCE is currently high for Intertek Group (LON:ITRK), we aren't jumping out of our chairs because returns are decreasing.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the 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£434m ÷ (UK£2.6b - UK£794m) (Based on the trailing twelve months to June 2021).

So, 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

LSE:ITRK Return on Capital Employed November 11th 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, you can check out the forecasts from the analysts covering Intertek Group here for free.

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

There hasn't been much to report for Intertek Group's returns and its level of capital employed because both metrics have been steady for the past five years. Businesses with these traits tend to be mature and steady operations because they're past the growth phase. So it may not be a multi-bagger in the making, but given the decent 24% return on capital, it'd be difficult to find fault with the business's current operations. With fewer investment opportunities, it makes sense that Intertek Group has been paying out a decent 52% of its earnings to shareholders. Given the business isn't reinvesting in itself, it makes sense to distribute a portion of earnings among shareholders.

What We Can Learn From Intertek Group's ROCE

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. Although the market must be expecting these trends to improve because the stock has gained 81% over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

On a final note, we've found 1 warning sign for Intertek Group that we think you should be aware of.

Intertek Group 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.

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