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. 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 Inter Parfums (NASDAQ:IPAR), we don't think it's current trends fit the mold of a multi-bagger.
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. To calculate this metric for Inter Parfums, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.08 = US$56m ÷ (US$816m - US$119m) (Based on the trailing twelve months to September 2020).
Therefore, Inter Parfums has an ROCE of 8.0%. Ultimately, that's a low return and it under-performs the Personal Products industry average of 13%.
See our latest analysis for Inter Parfums
In the above chart we have measured Inter Parfums' 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 Inter Parfums here for free.
The Trend Of ROCE
When we looked at the ROCE trend at Inter Parfums, we didn't gain much confidence. Around five years ago the returns on capital were 11%, but since then they've fallen to 8.0%. And considering revenue has dropped while employing more capital, we'd be cautious. 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.
In Conclusion...
In summary, we're somewhat concerned by Inter Parfums' 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 189%. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.
Inter Parfums does have some risks though, and we've spotted 1 warning sign for Inter Parfums that you might be interested in.
While Inter Parfums 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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