There are a few key trends to look for if we want to identify the next multi-bagger. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after briefly looking over the numbers, we don't think Iren (BIT:IRE) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
Return On Capital Employed (ROCE): What is it?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Iren, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.053 = €394m ÷ (€9.0b - €1.6b) (Based on the trailing twelve months to September 2020).
Thus, Iren has an ROCE of 5.3%. Even though it's in line with the industry average of 4.8%, it's still a low return by itself.
Check out our latest analysis for Iren
In the above chart we have measured Iren's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Iren.
What Can We Tell From Iren's ROCE Trend?
The returns on capital haven't changed much for Iren in recent years. The company has employed 42% more capital in the last five years, and the returns on that capital have remained stable at 5.3%. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.
What We Can Learn From Iren's ROCE
In conclusion, Iren has been investing more capital into the business, but returns on that capital haven't increased. Since the stock has gained an impressive 72% over the last five years, investors must think there's better things to come. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.
Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for Iren (of which 1 doesn't sit too well with us!) that you should know about.
While Iren 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. 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.
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About BIT:IRE
Very undervalued 6 star dividend payer.
