IMCD (AMS:IMCD) Is Doing The Right Things To Multiply Its Share Price

Did you know there are some financial metrics that can provide clues of a potential 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. With that in mind, we've noticed some promising trends at IMCD (AMS:IMCD) so let's look a bit deeper.

Return On Capital Employed (ROCE): What is it?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for IMCD, this is the formula:

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

0.13 = €308m ÷ (€3.3b - €984m) (Based on the trailing twelve months to December 2021).

Thus, IMCD has an ROCE of 13%. That's a relatively normal return on capital, and it's around the 14% generated by the Trade Distributors industry.

Check out our latest analysis for IMCD

Above you can see how the current ROCE for IMCD 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 IMCD here for free.

What Does the ROCE Trend For IMCD Tell Us?

We like the trends that we're seeing from IMCD. Over the last five years, returns on capital employed have risen substantially to 13%. The amount of capital employed has increased too, by 92%. So we're very much inspired by what we're seeing at IMCD thanks to its ability to profitably reinvest capital.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Effectively this means that suppliers or short-term creditors are now funding 30% of the business, which is more than it was five years ago. It's worth keeping an eye on this because as the percentage of current liabilities to total assets increases, some aspects of risk also increase.

The Bottom Line On IMCD's ROCE

All in all, it's terrific to see that IMCD is reaping the rewards from prior investments and is growing its capital base. Since the stock has returned a staggering 249% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it's worth looking further into this stock because if IMCD can keep these trends up, it could have a bright future ahead.

One final note, you should learn about the 3 warning signs we've spotted with IMCD (including 1 which can't be ignored) .

While IMCD 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.