Be Wary Of IG Design Group (LON:IGR) And Its Returns On Capital

By
Simply Wall St
Published
April 12, 2022
AIM:IGR
Source: Shutterstock

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. In light of that, when we looked at IG Design Group (LON:IGR) and its ROCE trend, we weren't exactly thrilled.

What is 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 IG Design Group is:

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

0.044 = US$23m ÷ (US$962m - US$448m) (Based on the trailing twelve months to September 2021).

So, IG Design Group has an ROCE of 4.4%. Ultimately, that's a low return and it under-performs the Consumer Durables industry average of 11%.

Check out our latest analysis for IG Design Group

roce
AIM:IGR Return on Capital Employed April 12th 2022

Above you can see how the current ROCE for IG Design Group compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering IG Design Group here for free.

What Can We Tell From IG Design Group's ROCE Trend?

When we looked at the ROCE trend at IG Design Group, we didn't gain much confidence. Around five years ago the returns on capital were 17%, but since then they've fallen to 4.4%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a side note, IG Design Group has done well to pay down its current liabilities to 47% of total assets. That could partly explain why the ROCE has dropped. 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. Either way, they're still at a pretty high level, so we'd like to see them fall further if possible.

Our Take On IG Design Group's ROCE

While returns have fallen for IG Design Group in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. Despite these promising trends, the stock has collapsed 77% over the last five years, so there could be other factors hurting the company's prospects. Regardless, reinvestment can pay off in the long run, so we think astute investors may want to look further into this stock.

One more thing: We've identified 5 warning signs with IG Design Group (at least 2 which are a bit unpleasant) , and understanding these would certainly be useful.

While IG Design Group isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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