Here's What's Concerning About One Media iP Group's (LON:OMIP) Returns On Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. However, after briefly looking over the numbers, we don't think One Media iP Group (LON:OMIP) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for One Media iP Group:

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

0.029 = UK£479k ÷ (UK£18m - UK£1.7m) (Based on the trailing twelve months to April 2024).

So, One Media iP Group has an ROCE of 2.9%. In absolute terms, that's a low return and it also under-performs the Entertainment industry average of 10%.

View our latest analysis for One Media iP Group

In the above chart we have measured One Media iP Group's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for One Media iP Group .

What Does the ROCE Trend For One Media iP Group Tell Us?

In terms of One Media iP Group's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 6.0% over the last five years. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. 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.

In Conclusion...

Bringing it all together, while we're somewhat encouraged by One Media iP Group's reinvestment in its own business, we're aware that returns are shrinking. And in the last five years, the stock has given away 28% so the market doesn't look too hopeful on these trends strengthening any time soon. Therefore based on the analysis done in this article, we don't think One Media iP Group has the makings of a multi-bagger.

One more thing, we've spotted 1 warning sign facing One Media iP Group that you might find interesting.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com