Here's What To Make Of Inchcape's (LON:INCH) Decelerating Rates Of Return

There are a few key trends to look for if we want to identify the next multi-bagger. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. That's why when we briefly looked at Inchcape's (LON:INCH) ROCE trend, we were pretty happy with what we saw.

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. Analysts use this formula to calculate it for Inchcape:

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

0.17 = UK£539m ÷ (UK£6.7b - UK£3.5b) (Based on the trailing twelve months to June 2023).

Therefore, Inchcape has an ROCE of 17%. In absolute terms, that's a satisfactory return, but compared to the Retail Distributors industry average of 14% it's much better.

See our latest analysis for Inchcape

In the above chart we have measured Inchcape'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 report on analyst forecasts for the company.

What Does the ROCE Trend For Inchcape Tell Us?

The trend of ROCE doesn't stand out much, but returns on a whole are decent. The company has employed 63% more capital in the last five years, and the returns on that capital have remained stable at 17%. 17% is a pretty standard return, and it provides some comfort knowing that Inchcape has consistently earned this amount. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.

On a separate but related note, it's important to know that Inchcape has a current liabilities to total assets ratio of 52%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Bottom Line On Inchcape's ROCE

In the end, Inchcape has proven its ability to adequately reinvest capital at good rates of return. In light of this, the stock has only gained 25% over the last five years for shareholders who have owned the stock in this period. So to determine if Inchcape is a multi-bagger going forward, we'd suggest digging deeper into the company's other fundamentals.

If you'd like to know more about Inchcape, we've spotted 3 warning signs, and 1 of them can't be ignored.

While Inchcape 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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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.