Capital Allocation Trends At ICF International (NASDAQ:ICFI) Aren't Ideal

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after briefly looking over the numbers, we don't think ICF International (NASDAQ:ICFI) 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?

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. To calculate this metric for ICF International, this is the formula:

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

0.071 = US$123m ÷ (US$2.1b - US$369m) (Based on the trailing twelve months to June 2023).

Thus, ICF International has an ROCE of 7.1%. In absolute terms, that's a low return and it also under-performs the Professional Services industry average of 12%.

See our latest analysis for ICF International

In the above chart we have measured ICF International'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 ICF International here for free.

So How Is ICF International's ROCE Trending?

In terms of ICF International's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 8.9%, but since then they've fallen to 7.1%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

Our Take On ICF International's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for ICF International. And the stock has followed suit returning a meaningful 78% to shareholders over the last five years. So should these growth trends continue, we'd be optimistic on the stock going forward.

Like most companies, ICF International does come with some risks, and we've found 2 warning signs that you should be aware of.

While ICF International may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.