Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. However, after briefly looking over the numbers, we don't think Investment Holding Group - Q.P.S.C (DSM:IGRD) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
What is 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. Analysts use this formula to calculate it for Investment Holding Group - Q.P.S.C:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.012 = ر.ق12m ÷ (ر.ق1.4b - ر.ق369m) (Based on the trailing twelve months to June 2021).
Thus, Investment Holding Group - Q.P.S.C has an ROCE of 1.2%. In absolute terms, that's a low return and it also under-performs the Construction industry average of 8.5%.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Investment Holding Group - Q.P.S.C's ROCE against it's prior returns. If you're interested in investigating Investment Holding Group - Q.P.S.C's past further, check out this free graph of past earnings, revenue and cash flow.
So How Is Investment Holding Group - Q.P.S.C's ROCE Trending?
When we looked at the ROCE trend at Investment Holding Group - Q.P.S.C, we didn't gain much confidence. To be more specific, ROCE has fallen from 30% over the last five years. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.
On a side note, Investment Holding Group - Q.P.S.C has done well to pay down its current liabilities to 27% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.
In summary, we're somewhat concerned by Investment Holding Group - Q.P.S.C's diminishing returns on increasing amounts of capital. The market must be rosy on the stock's future because even though the underlying trends aren't too encouraging, the stock has soared 163%. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.
Investment Holding Group - Q.P.S.C does come with some risks though, we found 4 warning signs in our investment analysis, and 1 of those is potentially serious...
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
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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.
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