If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So when we looked at Interpump Group (BIT:IP) and its trend of ROCE, we really liked what we saw.
What is 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 Interpump Group is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.15 = €234m ÷ (€2.1b - €452m) (Based on the trailing twelve months to June 2020).
Therefore, Interpump Group has an ROCE of 15%. On its own, that's a standard return, however it's much better than the 4.8% generated by the Machinery industry.
Above you can see how the current ROCE for Interpump 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 Interpump Group here for free.
How Are Returns Trending?
Investors would be pleased with what's happening at Interpump Group. The data shows that returns on capital have increased substantially over the last five years to 15%. The amount of capital employed has increased too, by 67%. So we're very much inspired by what we're seeing at Interpump Group thanks to its ability to profitably reinvest capital.
The Bottom Line On Interpump Group's ROCE
A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Interpump Group has. Since the stock has returned a staggering 162% to shareholders over the last five years, it looks like investors are recognizing these changes. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.
If you want to continue researching Interpump Group, you might be interested to know about the 2 warning signs that our analysis has discovered.
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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