Capital Allocation Trends At IAR Systems Group (STO:IAR B) Aren't Ideal

If you're looking for a multi-bagger, there's a few things to 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. 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 investigating IAR Systems Group (STO:IAR B), we don't think it's current trends fit the mold of a multi-bagger.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for IAR Systems Group:

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

0.11 = kr73m ÷ (kr851m - kr180m) (Based on the trailing twelve months to June 2022).

So, IAR Systems Group has an ROCE of 11%. In absolute terms, that's a pretty standard return but compared to the Software industry average it falls behind.

View our latest analysis for IAR Systems Group

In the above chart we have measured IAR Systems Group's 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 IAR Systems Group here for free.

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at IAR Systems Group doesn't inspire confidence. To be more specific, ROCE has fallen from 39% over the last five years. However it looks like IAR Systems Group might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

The Bottom Line

In summary, IAR Systems Group is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Additionally, the stock's total return to shareholders over the last five years has been flat, which isn't too surprising. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

IAR Systems Group could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation on our platform quite valuable.

While IAR Systems Group 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.