Capital Allocation Trends At i3 Verticals (NASDAQ:IIIV) Aren't Ideal

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. Having said that, from a first glance at i3 Verticals (NASDAQ:IIIV) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What Is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for i3 Verticals, this is the formula:

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

0.028 = US$19m ÷ (US$780m - US$106m) (Based on the trailing twelve months to June 2022).

Thus, i3 Verticals has an ROCE of 2.8%. Ultimately, that's a low return and it under-performs the IT industry average of 12%.

See our latest analysis for i3 Verticals

Above you can see how the current ROCE for i3 Verticals 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 i3 Verticals here for free.

What Does the ROCE Trend For i3 Verticals Tell Us?

When we looked at the ROCE trend at i3 Verticals, we didn't gain much confidence. Around five years ago the returns on capital were 7.0%, but since then they've fallen to 2.8%. 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. If these investments prove successful, this can bode very well for long term stock performance.

The Bottom Line On i3 Verticals' 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 i3 Verticals. However, total returns to shareholders over the last three years have been flat, which could indicate these growth trends potentially aren't accounted for yet by investors. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

i3 Verticals 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 i3 Verticals 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.