What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. With that in mind, the ROCE of iEnergizer (LON:IBPO) looks great, so lets see what the trend can tell us.
Understanding Return On Capital Employed (ROCE)
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on iEnergizer is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.29 = US$54m ÷ (US$226m - US$38m) (Based on the trailing twelve months to September 2020).
Thus, iEnergizer has an ROCE of 29%. In absolute terms that's a great return and it's even better than the IT industry average of 10.0%.
Above you can see how the current ROCE for iEnergizer compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for iEnergizer.
The Trend Of ROCE
iEnergizer is displaying some positive trends. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 29%. Basically the business is earning more per dollar of capital invested and in addition to that, 24% more capital is being employed now too. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.
The Bottom Line On iEnergizer's ROCE
To sum it up, iEnergizer has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And a remarkable 3,034% total return over the last five years tells us that investors are expecting more good things to come in the future. Therefore, we think it would be worth your time to check if these trends are going to continue.
iEnergizer does have some risks though, and we've spotted 2 warning signs for iEnergizer that you might be interested in.
High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.
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