IDE Group Holdings (LON:IDE) Is Doing The Right Things To Multiply Its Share Price

If you're looking for a multi-bagger, there's a few things to keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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. With that in mind, we've noticed some promising trends at IDE Group Holdings (LON:IDE) so let's look a bit deeper.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on IDE Group Holdings is:

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

0.079 = UK£860k ÷ (UK£16m - UK£4.6m) (Based on the trailing twelve months to June 2022).

Therefore, IDE Group Holdings has an ROCE of 7.9%. In absolute terms, that's a low return and it also under-performs the IT industry average of 9.9%.

Check out our latest analysis for IDE Group Holdings

In the above chart we have measured IDE Group Holdings' 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 IDE Group Holdings here for free.

What Does the ROCE Trend For IDE Group Holdings Tell Us?

We're pretty happy with how the ROCE has been trending at IDE Group Holdings. We found that the returns on capital employed over the last five years have risen by 491%. The company is now earning UK£0.08 per dollar of capital employed. Speaking of capital employed, the company is actually utilizing 84% less than it was five years ago, which can be indicative of a business that's improving its efficiency. A business that's shrinking its asset base like this isn't usually typical of a soon to be multi-bagger company.

The Bottom Line

From what we've seen above, IDE Group Holdings has managed to increase it's returns on capital all the while reducing it's capital base. Although the company may be facing some issues elsewhere since the stock has plunged 97% in the last five years. Regardless, we think the underlying fundamentals warrant this stock for further investigation.

One final note, you should learn about the 4 warning signs we've spotted with IDE Group Holdings (including 3 which are potentially serious) .

While IDE Group Holdings 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.